The Large Benefits of Short-Term Health Insurance

Competition Works, Even in Health Insurance

On Monday, I watched a fascinating discussion on Zoom that the Cato Institute hosted: health policy experts Michael Cannon of the Cato Institute and Brian Blase of the Paragon Institute discussing a Biden administration proposal to force people off short-term health insurance. It made me more aware of an insurance option that I hadn’t been aware of. The reason is that to the extent I pay attention, I do it as a parent helping my adult daughter find health insurance. But she lives in California, whose government, in its wisdom, bans such policies.

The big surprise I had was not that allowing a competitive option is good for customers. Duh. The surprise was that letting people buy these policies did not seem to drive up premiums in the Affordable Care (ACA) market. So allowing them is a double win.

Background

The 1996 Health Insurance Portability and Accountability Act (HIPAA) allowed state governments to have short-term limited duration health insurance (STLDI). The contract could last up to 364 days. But after the Patient Protection and Affordable Care Act (PPACA, henceforth ACA) was implemented in 2014, the Obama administration, concerned that healthier people would buy these contracts, leaving a sicker pool and, therefore, higher premiums and taxpayer subsidies in the ACA market, limited the plans to 3 months. This was implemented in 2016 and reversed by the Trump administration in 2018.

The Analysis

Being able to be insured for a whole year has been valuable to millions of people. And losing one’s insurance after 3 months can be catastrophic. Imagine, as has happened, that you have such a short term policy starting in January and you get cancer your first month. With a limit of 3 months, you get thrown off and can’t get an ACA plan until the next January. No insurance company pays the thousands or, more likely, tens of thousands, of dollars for your treatment. And that comes about not because of a big bad insurance company but because of explicit and intended government policy. That’s horrible.

So you don’t have to convince me that giving people this competitive option and letting them have it for a whole year is a good idea for them. Even better, these policies can be renewed twice so that you can be covered in one policy for 3 years. That means that if your health deteriorates during that time, you’re safe from new underwriting by the insurance company that adjusts for your higher risk.

Note the bitter irony. The heads of two presidential administrations said, “Our approach would preserve the right of Americans who have insurance to keep their doctor and their plan,” (Obama in 2010) and “If you have private insurance, you can keep it,” (Biden in 2019). Yet Obama took away private insurance from people with short-term plans and Biden proposes to do the same.

One thing that’s great about these plans is that in the states that allow them, people can buy relatively low-price insurance with deductibles that are lower than those in the ACA plans.

The Pleasant Surprise

Even though I like the idea of allowing people to buy health insurance and not be thrown off health insurance before they can replace it, I did buy the argument of the critics of STLDI plans that such plans would attract the relatively healthy, thus driving up premiums and taxpayer subsidies for the sicker people left in the ACA plans.

I still think such plans would attract the relatively healthy.

But here’s the pleasant surprise, from a study by health economist Brian Blase, president of the Paragon Institute and author of “Short-Term Health Plans, Long-Term Benefits,” September 2023. States that were favorable to STLDIs actually have had ACA rates fall between 2018 (when the feds re-allowed them) and 2023. States that were unfavorable to STLDIs either because their governments restricted the plans to 6 months or banned them (or made regulation so onerous that insurers chose not to offer such plans) had ACA rates rise or fall less than in favorable states. In states that banned such policies, the ACA rates rose the most. See Table 8 on page 11 for the empirical results.

How would you account for this. Here’s what Blase wrote in 2021, and quoted in his 2023 study, to explain that somewhat surprising finding: