Obamacare's unintended consequence: More Americans buy short-term plans

When John Mendola retired in early 2013, the group health insurance plan he and his wife, Joan, had relied on for years ceased to cover them. Because he was over 65, he went directly into Medicare. But Joan was too young — at 64, she was a year short. The Affordable Care Act’s first open-enrollment period was on the horizon, but not yet an option. She shopped around and found that regular comprehensive care would cost $500 to $600 a month. “That was too much,” says Joan. “So then I found a plan that was $200 to $400. That was the one for me.”

She chose a short-term plan — sometimes called a “gap” or “catastrophic-coverage” plan — that Joan thought would suffice for a year. She was a relatively healthy 64, after all. But a few weeks after enrolling, she suffered a stroke. The hospital where she ended up, she says, charged “five, six, seven times the amount a CAT scan should cost.” Joan would know; she was a nurse before retiring and her husband was a doctor. When she tried to file the claim, she says, “the company just denied it, denied it, denied it,” on the basis that the stroke was due to a pre-existing condition. The Mendolas were stuck with the inordinately high bill.

While there are no good industry-wide details on how many people are enrolled in short-term plans, recent reports show that the numbers have been rising since the ACA went into effect. Last week, eHealthInsurance, one of the nation’s largest online health-insurance brokers, stated that from 2013 to 2014, the number of applicants it received for short-term plans more than doubled, from 60,000 to 140,000. EHealth is not alone. Agile Health Insurance and GoHealth, among others, have also reported that their rosters of short-term customers have grown significantly in the past few years.

Depending on the outcome this month of the Supreme Court case King v. Burwell, those numbers could increase even more. Though loaded with technical arguments and legalese, the case, at its core, is relatively simple. The plaintiffs claim that the ACA only allows for online insurance marketplaces set up by the states, not by the federal government. Thus, they argue, the tax subsidies currently provided to those who purchased health plans in one of the 34 states that have a federally run marketplace are illegal. The Urban Institute estimates that 8.2 million people are at risk of losing their insurance if the plaintiffs win.

Insurance-industry insiders expect that if that happens, some of those individuals who would lose their tax subsidies will then buy short-term plans. “Every dollar counts in a monthly budget,” says Nate Purpura, eHealth’s vice president of communications. “If you take the subsidies away, I definitely think people will come back and look for something cheaper. Short-term [plans are] something a lot of people would encounter and enroll in.”

According to eHealth, the majority of people who purchased short-term plans either misunderstood or missed the ACA’s open-enrollment period and didn’t have a “qualifying life event,” such as having a baby or moving to a new state, that would have made them eligible for a special-enrollment period. Take Randie Hallett. This past February, the 31-year-old from Hermosa Beach, California, was laid off. She couldn’t afford COBRA, the option to stay on her employer-sponsored plan on her own dime. And the ACA enrollment period for 2015 had already ended.

So she searched on the individual-insurance market, and the short-term plan seemed like the best option: It was cheap, and since she figured she’d land another job soon enough, a gap solution seemed to make sense. Hallett had never really been sick before. (“Knock on wood,” she says.) She ended up only using her temporary coverage twice, both times to get her blood drawn. Once was to test for chicken-pox antibodies and the other to confirm she’d had all her standard vaccines, both required by a potential employer. She got the job and starts in July. The plan, she says, “was a great peace of mind to have” in the interim.

That’s essentially the role these plans are designed to play: short-term catastrophic coverage, best suited for the young and healthy. And most people who buy these plans are young: 57 percent of eHealth’s short-term-plan buyers are between the ages of 18 and 34. (By comparison, the 15-to-34 age group makes up just 27.4 percent of the U.S. population, according to the latest census data.)

But not everyone buying these plans is healthy. Some fall into what is known as the ACA’s “coverage gap.” After a 2012 Supreme Court decision finding that the federal government could not force states to accept the law’s expansion of Medicaid, 34 states chose to opt out, leaving an estimated 4 million people too well off to qualify for the federal program and too poor to qualify for subsidies. According to eHealth, 10 percent of its short-term plan holders are in this category. These people tend to have health problems: The Kaiser Family Foundation calculates that of the 4 million people caught in the coverage gap, 18 percent are in “fair or poor health.”

For those who need extensive health treatment, says Jean Abraham, a professor of health policy and management at the University of Minnesota, “these time-limited plans tend to be really poor value.” They have high fees and administrative costs. And because short-term policies are not regulated by the ACA, they generally don’t cover many services. For example, preventative care — including maternity care and the treatment of mental illness — is often excluded. Nor do the plans always cover prescription drugs, and they often have confusing reimbursement schemes.

Insurers can also reject applications outright for people who have a pre-existing condition — or decide not to cover certain conditions even after a customer has enrolled. “If you buy a policy and then a month later, if you get sick, they can go back and say it was from a pre-existing condition,” says Karen Pollitz, a senior fellow at the Kaiser Family Foundation. “Then they won’t pay.” That’s how Mendola got stuck with her huge hospital bill.

The comparatively low price of short-term plans, meanwhile, is a big part of their attraction. Some people may see the plans as the cheapest way to fulfill the ACA’s requirement to secure health coverage (and avoid the annual penalty for those who remain uninsured). In 2016, people who didn’t buy insurance by this year’s deadline will be fined either $325 or 2 percent of their yearly income above the tax filing threshold, about $10,150 for an individual.

But that approach is misguided. The short-term plans don’t conform to the ACA’s “Patient’s Bill of Rights,” so for the purpose of meeting the insurance requirement, people with these plans may as well be uninsured. Health insurers are obligated to communicate this fact, and Purpura, of eHealth, says the company goes out of its way “to help people understand the limitations” of gap plans. The eHealth website does state that under the short-term plans, benefits are “limited” and people who buy the plans “may still be subject to the tax penalty.” But in many cases, people buy insurance through third-party brokers and agents, “a kind of middleman that is providing info to consumers,” says Abraham. “And if brokers or agents are not fully informed or being forthright to consumers, people might be inadvertently buying them thinking they will meet the standard.”

Others believe that if the Supreme Court sides with King, that will push people out of the insurance market altogether. “A lot of the people who need subsidies probably can’t afford short-term plans either,” says Pollitz. The real concern, she says, is “that a lot of people will just end up uninsured. And then the next question is, what happens to the underlying market?”

She’s referring to the ACA “death spiral,” the idea that without the young and healthy to essentially subsidize the higher costs of caring for the older and sicker, insurance premiums will rise dramatically, maybe even to a point where the whole health system collapses. Of course, this would only happen if the Supreme Court rules in favor of King — and makes no additional decisions to, as Allison Hoffman, a professor of health care law and policy at UCLA puts it, “provide some buffer that would allow the shock to be reduced or at least allow people to prepare for that change.”

But even if the justices decide to preserve the subsidies, as many court-watchers predict, short-term plans are not going away. They may even continue to spread. And this, consumer advocates say, is problematic, at least for those relying on the plans to keep them healthy. These plans do not automatically renew, and every time policyholders reapply, they face the possibility that the insurer will deny them health coverage.

“You’re taking a chance,” says Pollitz. “If you buy a six-month policy and you get hit by a car in the fourth month and you need care after the sixth month, they’re not going to renew it. You can count on that.”