Expanding Short-Term Health Plans Sounds Free Market. It's Not.

Short-term health plans have gained favor among some state health commissioners lately as a creative, even cheeky way to avoid the absurdly high costs of insurance while still complying with the Affordable Care Act — an end-run around the law since efforts to repeal it have stalled.

In line with its broader commitment to federalism, the Trump administration has given states more freedom to expand the availability of these plans. On August 1, it issued new rules that allow states to make the policies available for 12-month periods instead of the current limit of three months. Policyholders also would be able to renew them for additional years if state insurance commissioners follow the Trump administration’s suggestion to expand availability. Some conservatives who oppose Obamacare are now encouraging the states to expand the plans because it seems like an admirable move in restoring free-market principles to health care.

It’s not.

State insurance commissioners should respond with appreciation to the Trump administration for granting them new authorities, but they shouldn’t expand short-term plans. Thanks for returning rightful power to the states, they should say, but expanding short-term plans won’t help anyone. In fact, it will increase costs for state and federal governments as well as — more importantly — the most vulnerable consumers.

The president’s plan permits state insurance commissioners to make short-term, limited-duration health insurance available to more consumers. The longer plan period would make them more attractive to many consumers.

What’s wrong with giving states more freedom to expand these plans, and consumers more freedom of choice? The answer is that Obamacare still looms over Americans. If the law had been repealed and there were a truly free market for health insurance, expanding short-term plans could be more accurately seen as introducing market-based reforms and restoring federalism.

With Obamacare still in place, however, expanding the availability of short-term plans would exacerbate existing problems within the insurance market. Skyrocketing premiums and deductibles are driven in large part by the lack of young, healthy adults willing to buy policies on the exchanges. This leaves only the older and sicker consumers who have no choice but to pay the high costs. As a result, insurers end up with a customer population skewed much more towards high utilization than they were promised. They raise prices to survive, more young people refuse to buy their policies, and the cycle continues.

The much lower costs associated with short-term health plans will siphon off more of those healthy young people with low utilization, making the problem more acute. Sixty percent of individuals purchasing short-term plans in 2017 through the online broker eHealth were between the ages of 18 and 34, compared to just 27 percent on the Obamacare exchange. The elimination of the individual mandate penalty next year could drive even more consumers to short-term plans if they are more readily available, since there will be no fine to offset the significant savings.

And you can’t blame them for finding short-term plans alluring. Because the plans do not have to comply with Obamacare rules — providing less coverage and excluding some preexisting conditions — premiums are much lower than for ACA-compliant plans. The average monthly premium for short-term plans sold through eHealth in 2017 was $109 for individuals and $264 for families, a huge savings over the $378 for individuals and $997 for families buying ACA-compliant plans.

You don’t get much for that low premium, however. A review by the Henry J. Kaiser Family Foundation found that of the more than 600 short-term plans offered across the country by two insurers, only 29 percent covered prescription drug coverage and none covered maternity care.

Consumers purchasing short-term plans might feel like they’ve finally found a way out of the Obamacare trap with coverage at a reasonable price. While they’re unlikely to benefit much from those skimpy plans, they’re gambling that they’re young and healthy enough to make it a safe bet anyway. That would be fine if everyone could make that free choice and decide to save money or invest in a more substantial policy. They can’t, though, because Obamacare hasn’t been repealed.

For millions of Americans, short-term plans are not an option because either they cannot qualify or their health needs are greater than the coverage provides. That leaves them with only ACA-compliant plans.

While expanding short-term plans is a nod to the free-market philosophy, it inadvertently herds more unwilling Americans into the oppressive Obamacare exchanges, thus driving the prices higher. The AARP Public Policy Institute projects that 60-year-olds purchasing silver coverage could see a $4,000 increase in premiums if short-term plans are expanded. The Kaiser Foundation says middle-income Americans will be hit hard by the premium increases because they will not be eligible for subsidies but will still have to buy ACA-compliant plans.

The amount spent on subsidies will increase nonetheless, as those eligible face the same rising premiums as everyone else. Medicare’s chief actuary determined that expanding short-term plans would cost the government $1.2 billion next year and a total of $38.7 billion over 10 years because the expenditure on subsidies would have to keep pace with rising premiums. Analysts also worry that lack of adequate coverage under short-term plans could drive people into government programs such as Medicaid, putting a burden on state coffers as well as federal.

The Trump administration should be applauded for returning power to the states. But those states have the responsibility to use that power wisely; in this case, that means saying no to what the administration is proposing.

Gregory A. Freeman is an author and health-care journalist.