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Three Questions

Three Questions: Prof. Jason Abaluck on Short-Term Health Insurance

Earlier this year, the Trump administration issued a new rule allowing consumers to enroll for up to a year in low-cost, short-term health insurance plans that don’t meet the requirements of the Affordable Care Act. We asked Yale SOM health economist Jason Abaluck how the change could affect consumers and the insurance markets.

Patients in the emergency waiting room of John H. Stroger Hospital in Chicago. Photo: Jose More/VWPics via AP Images.

What kind of coverage do the newly legal short-term insurance plans offer? Who are they intended for?

My understanding of the new rules is that short-term plans are now effectively health insurance plans exempted from the regulations in the Affordable Care Act. The original “intent” of short-term plans is a tricky question since the various political actors involved had different intents. Based on the regulations, the Obama administration sought to use short-term plans as a narrowly targeted solution to fill “gaps” in the ACA. For example, people who get coverage from their employers and are between jobs can use them as a temporary solution until insurance from their new employer kicks in. The Trump administration appears to want to use short-term plans as a broader way of skirting the regulations of the ACA. They have extended the enrollment period for short-term plans to 364 days. This means short-term plans are an effective substitute for ACA plans for individuals who want to pay less money in exchange for less generous coverage (usually healthier people).

“Healthy people may be made worse off because what they really want is to choose a reasonably priced exchange plan, and this is no longer an option if short-term health insurance is available and driving up the price of exchange plans.”

What regulations are short-term plans exempt from? Short-term plans are permitted to turn beneficiaries away (they are not “guaranteed issue”). This will mean they are not really an option for sick people. ACA plans are required to pay a substantial fraction of costs for many conditions. Short-term plans need not offer this coverage. Finally, short-term plans cannot be automatically renewed, meaning that the insurer can kick you out the following year if you get sick.

Will these plans provide coverage for large, unexpected healthcare costs, like a major illness or injury? What are the potential outcomes for individuals who make use of them?

As far as I know, short-term plans could offer such coverage, but they have little incentive to do so. If a plan were looking to appeal to the segment of the market interested in paying more for comprehensive coverage, they might as well comply with the ACA so that they could take advantage of the subsidies offered to many exchange beneficiaries for choosing ACA plans. Short-term plans will likely instead offer much more minimal coverage. Economic theory tells us that the value of insurance coverage comes principally from the protection against large, unexpected healthcare costs that these plans will not offer.

Evaluating the overall impact on individuals who use them is complicated. If those individuals are very healthy, they may be better off due to the option to purchase a plan with minimal coverage. At the very least, buying some health insurance allows them to take advantage of negotiated prices and gives them access to the healthcare system. However, there is now a substantial quantity of evidence that consumers cannot be relied on to choose health plans that are best for them, so some beneficiaries may mistakenly opt for low-premium, short-term insurance plans even if the premium savings are ultimately not worth the reduction in coverage.

In my view, there is also very good evidence that having insurance makes people healthier than not having insurance (see this review of the research). However, the degree to which the health benefits of insurance vary across different types of insurance plans is much less well understood (I’m working on a research project now attempting to quantify this, so ask me again next year!). The availability of short-term plans could make people healthier if people who would otherwise remain uninsured purchase these plans, or it may make people less healthy if people substitute to these plans from more generous ACA plans. The existing evidence is too sparse to draw any firm conclusions.

What is the potential impact on the larger insurance markets?

This is a very important question in this context. The provisions of the ACA—including the individual mandate—were designed to encourage healthy people to pool with sick people in exchange plans. This mitigates what economists call “adverse selection”: at any given premium, the people who will voluntarily purchase insurance are the sickest people. This means insurers risk losing money if they price at expected cost: if they charge $10,000 per year in premiums, the people who most want to buy that plan are the people who expect to get more than $10,000 worth of coverage. In response, insurers can increase their premiums even more, but that just makes the problem worse. The mandate is designed to counteract this problem by forcing even healthy people to purchase insurance.

The availability of short-term health insurance makes adverse selection worse. The healthiest people will now choose this alternative option, leaving only the sickest people in exchange plans, which will lead to higher premiums on the exchange. You might say, “Well sure, the healthy people were subsidizing the sick people and now they’ll be better off and the sick people worse off.” This is not necessarily true: risk pooling does more than share the cost of premiums between the healthy and the sick; it also keeps premiums lower on average for everyone because insurers don’t have to price way above cost in order to break even. Healthy people may be made worse off because what they really want is to choose a reasonably priced exchange plan, and this is no longer an option if short-term health insurance is available and driving up the price of exchange plans. For this reason, my policy preference would be to limit the availability of short-term plans either to individuals with a true short-term need (the 90-day variant) or individuals who can demonstrate that ACA subsidies are not sufficient to make full coverage affordable. This way healthy people in general would not have an incentive to opt out of exchange plans.

Will the new regulations make things worse? Some people who otherwise wouldn’t have coverage will now get some coverage for the whole year, which should make them better off. Expanding short-term health insurance will likely worsen adverse selection, but how much remains to be seen. Some consumers might inadvertently purchase too little coverage, but the extent of this behavior and any health consequences are uncertain.

Department: Three Questions