'Junk Insurance' Part 1: A Regulatory Case Study

The regulatory tug of war over short-term limited duration insurance.

Short-term limited duration insurance (STLDI) is "health coverage provided pursuant to a contract with an issuer that has an expiration date specified in the contract … taking into account renewals or extensions" (federal regulatory definition). Introduced in 1997, STLDI provides gap protection during health insurance coverage transitions (e.g., job loss or change). It still does but the rules keep changing.

Proponents argue that STLDI provides valuable protective coverage. Opponents agree, unless consumers choose STLDI as a longer-term coverage option — at which point, it becomes "junk insurance." Labeled as such throughout the new Biden regulation footnotes, STLDI lacks the federal coverage mandates of Marketplace plans: 10 Essential Health Benefits (EHB) and their out-of-pocket maximums (MOOP), free preventive services, and guaranteed issue.

Conversely, STLDI is often much cheaper and the benefits it may exclude aren't benefits that every consumer needs. This includes healthy, younger and/or childless individuals with no pre-existing conditions who may not require most preventive services, many of which apply only to older and/or specific high-risk populations.

This is not to make a case for or against STLDI as a longer-term coverage option. But rather, poses a question: Should consumers have less choice when healthcare still struggles to deliver on its core functions:

• Access. As of early 2023, 7.7% of Americans remain uninsured (HHS).
• Affordability. Rising costs have delayed health care, worsened outcomes, and increased medical debt — including for the insured (Commonwealth Fund).
• Reliability. As of 2022, wait times for new patient appointments averaged 26 days across 15 metropolitan areas (Washington Post).

These are the products of patchwork U.S. healthcare policy — forged from crisis response and coverage gap plugs versus a unified approach that serves human health above political interests. STLDI sits at the nexus. With new rules yet again pending, it deserves a closer look.

The federal tug of war

STLDI plans are largely state regulated, including whether they can be sold at all. The only aspects of STLDI governed by federal regulations are its core definition and policy term durations. The latter is where the battle is raging:

• 2016: The Obama Administration regulations reduced STLDI term lengths to less than three months.
• 2018: The Trump Administration expanded STLDI terms up to three years.
• 2023: The Biden Administration seeks to again reduce policy terms, this time up to four months.

The Biden rule, proposed in July 2023, has received nearly 16,000 public comments with final publication scheduled for April 2024.

A risk to the risk pool

Before 2016, a policy term of up to 12 months had been in place for STLDI for nearly two decades. Since 2016, federal regulations governing STLDI have been updated three times.

Why this tug of war? Easy: The Marketplace.

Authorized by the Affordable Care Act (ACA), Marketplace plans offer coverage with no medical underwriting, required access to 10 EHBs, free designated preventive services, and premium tax credits (PTC, or subsidies) that reduce costs for those who qualify.

The 2016 STLDI regulations noted: "Because short-term, limited-duration insurance is exempt from certain consumer protections, the Departments [Treasury, Labor, and HHS] are concerned that these policies may have significant limitations, such as lifetime and annual dollar limits on essential health benefits (EHB) and pre-existing condition exclusions, and therefore may not provide meaningful health coverage."

The proposed 2023 regulations make a similar argument. But the Democratic Administration regs said something else: "[B]ecause these policies can be medically underwritten based on health status, healthier individuals may be targeted for this type of coverage, thus adversely impacting the risk pool for Affordable Care Act-compliant coverage."

The 2018 Trump regulations acknowledged that longer terms for STLDI coverage — which costs less than many Marketplace plans, then and now — could "siphon off healthier individuals" and "have an impact on the risk pools for individual health insurance coverage, thereby raising premiums for such coverage."

The Trump rules, however, also cited the then-failures of the Marketplace, the lack of evidence "that short-term, limited-duration insurance policies have not historically or are unlikely to cover hospitalization and emergency services" and "the critical need for coverage options that are more affordable."

In 2018, enrollment was less than 12 million with one-quarter of enrollees having just one insurer to choose from (KFF). Large insurers like Aetna had left and only recently returned. Six years, one pandemic, and one administration later, the 2024 Marketplace has attracted a record-breaking 20+ million enrollees.

In contrast, less than 2.9 million Americans were enrolled in STLDI plans as of 2020 (2023 Commonwealth Fund report). After STLDI term lengths were extended, STLDI enrollment did grow and largely from Marketplace defection but by only one-fifth of the 1.5 million figure projected by the Congressional Budget Office.

Does long-term STLDI pose a real risk to the Marketplace? Not even the oversight agencies know entirely. Part 2 of this feature will explore those statistics and what's next for STLDI.