Personal Finance

A health plan that's cheaper but much riskier than standard health insurance

Key Points
  • The Trump administration just made it easier to buy short-term health plans. Here's what you need to know.
  • These short-term plans are much cheaper than plans that comply with the Affordable Care Act, although they often cover far less.
  • A cheaper plan may seem like a bargain, until you want to use it.
Getty Images

Open enrollment, the annual period where you can sign up for plans that fall under the Affordable Care Act — also popularly called Obamacare — has started.

In 2016, about 16 percent of Americans bought private individual health plans, which includes Affordable Care Act offerings sold on government exchanges, according to the U.S. Census Bureau.

Every year, millions of people have to make decisions about the kind of care they need. During the 2018 annual enrollment, for example, nearly 11.8 million people signed up or were automatically enrolled through the ACA.

But another choice, known as a short-term health plan, is much cheaper and designed to appeal to younger, healthier people, or people of any age who want to save money. Unlike ACA plans, you can sign up for them throughout the year.

Side-by-side, these plans cost far less. A 30-year-old woman in Chicago buying an ACA "Bronze" plan, according to Shaun Greene, senior vice president of AgileHealthInsurance, would pay $219.57 per month. If she buys a short-term plan, she'd pay approximately $120.

The White House earlier this month made a couple of important tweaks to short-term health plans, to increase their appeal to consumers. That's on top of ending the penalty for not buying standard health-care coverage.

You can now use subsidies to purchase short-term plans, depending on your state and income level. Next year, California will no longer allow these plans to be offered. Other states have enacted limits on how many times a plan can be renewed; still other states have expanded renewals.

Claire McAndrew, director of campaigns and partnerships at Families USA, an advocacy organization for health-care consumers, calls the change concerning and potentially illegal. "Federal law is very clear that those subsidies are for standard health insurance," she said.

The danger is that consumers could be diverted from buying regular health insurance.

HHS Secretary Alex Azar on short-term health plans

"If the plan can have a term of up to 12 months and is potentially renewable, a healthy person might not think twice about just enrolling for the full year," said Louise Norris, a writer and health insurance brokerage co-owner at Colorado Health Insurance Insider.

That short-term plan might prove to be wholly inadequate in the face of a serious medical condition. "And they're still stuck with having to wait until the start of the following year before they can get coverage under an ACA-compliant plan," Norris said.

Karen Pollitz senior fellow, health reform and private insurance at the Kaiser Family Foundation, says the changes will make it harder for people to see the difference between ACA plans and short-term plans.

"You see the words renewable and extensions, but they are meaningless words," Pollitz said. Renewals are always up to the insurer, not the consumer. "That is why the Obama administration put those limits in place," she said. "These policies will cut out on you when you get sick."

The fine print

Short-term insurance plans sometimes have strange rules. Families USA found a plan that would cover hospitalizations only if they started on a weekday — inpatient stays that began on the weekend would not be allowed, except in rare circumstances, according to McAndrew. (The exclusions are on page 14 in the above link.)

There is scant consensus among states on how to treat the sale of these plans. Some states prohibit them altogether. If you live in Massachusetts, New Jersey or New York, you can't buy a short-term plan.

Vermont wants to make short-term health insurance provide all the benefits guaranteed under the Affordable Care Act. Some states, including Missouri, Minnesota and Virginia, want to expand access, but so far have been unsuccessful.

The best way to see how your state regulates short-term health insurance is to search, a site that gives information on policy, regulation and prices.

When insurance companies cover you under a policy, they are assuming certain risks. If you get sick under an Affordable Care Act policy, the cost of your care will be covered as outlined in your policy description. Getting treatment won't hinder your ability to renew the plan.

You pay a higher premium, as well as other costs, for Affordable Care Act health policies, because in return for those costs, the insurance company will kick in a more generous portion in case you get sick and need care.

The lower up-front costs of a short-term health plan are a tipoff that they don't intend to pay much if you file a claim for an accident or an illness. Given how little they cost, they just don't cover very much, says McAndrew.

More in Personal Finance:
Young women with breast cancer face substantial financial and medical challenges
Meet the women of FIRE who are on track to retire very, very early
As midterms approach, men and women have starkly different views of their finances

Buyer beware

Greene, of AgileHealthInsurance, says the plans offer consumers a choice.

"All insurance is regulated, filed and reviewed by state insurance departments," Greene said. "If someone is in a short-term plan that is a bad fit, it's not junk insurance – it's the wrong plan.

"People need to understand what they're buying and buy the right thing."

The plans can be problematic for people who think they're going to have health issues. "If you take one and have issues, then shame on you, because you should have been on the other plan," Greene said.

Policies that are compliant with the Affordable Care Act do not use underwriting. You may have heard that term used in insurance contracts – here's what it means.

Insurance works best when the risk is spread out among many people. One way insurance companies manage risk is by finding out how risky it is to insure someone. For instance, young male drivers are considered to be more reckless, so they generally pay much higher rates for their car insurance.

Plans that comply with ACA regulations accept everyone, no questions asked. They are more expensive because they guarantee specific benefits, like maternity care.

All insurers that sell short-term plans, on the other hand, use underwriting to determine how expensive it might be to cover someone. You will have to answer questions about your personal health and habits before you're accepted.

If you answer a question that means you're going to cost more, you'll get a quick turn-down, like the one shown below.

If you're planning on having a child, or use tobacco products, or have a history of diabetes or other illness, short-term health insurers likely will turn you down.

Weakening the ACA market

Another change is allowing states to establish specific, parallel insurance marketplaces. "States can apply to take the waivers people would receive in the [ACA] marketplace and redistribute them [for buyers of short-term plans]," said Kaiser's Pollitz.

If healthy people leave the ACA market to buy short-term plans, it makes the ACA market less healthy and more risky for insurers. "That drives up [the cost of] premiums in the ACA-compliant pool," Norris said.

People who qualify for subsidies to buy their insurance are protected from rate hikes, says Norris. And healthy people who can buy cheaper insurance in the short-term market can save money that way.

The people most likely to suffer are those with pre-existing conditions who don't qualify for subsidies. Their premiums will rise precisely because short-term plans for healthy people have been expanded. "Just about every insurer in states that don't limit short-term plans included higher premiums for 2019," Norris said.