Short Term Duration Plan: Final Rule

On Wednesday, August 1st the Federal government released a final rule making it easier for individuals to buy short-term limited duration plans (STLDPs). You can read the rule here. The final rule largely adhered to the proposed rule that undid the previous Obama era restrictions on STLDIs with a change around renewal requirements.

In the fall of 2016 the Obama Administration, over concerns on adverse risk selection in the individual market, restricted short-term plans to a maximum of three months with no renewals. The current Administration proposed that restriction end and instead, pending state law, short-term plans could last for up to 364 days. Wakely’s analysis of the proposed rule found that approximately 400,000 to 800,000 individuals could enroll in these types of coverage.

The final rule included one potentially significant difference, the ability for plans to offer STLDIs that could be renewed up 36 months.  Ultimately, the likely effects of the renewal clause are within the margin of error of what we previously estimated (The Office of the Actuary estimated that the change would similarly have negligible effect). That being said, although numerically there may not be a large shift, it may increase the number of enrollees in these plans, and as such there are key considerations and potential effects the new policy has on the individual market.

Actuarial Ramifications

The inclusion of the potential renewal provision for short-term duration plans has actuarial implications. Carriers could offer individuals STLDI products that allow for individuals to have longer term coverage (i.e., longer than a year) without having to undergo underwriting at the end of effectively 12 months. Currently, individuals would have to go through underwriting every time the coverage ends (i.e., maximum of 12 months before having to re-undergo underwriting). This may appeal to slightly less healthy individuals or individuals with longer time horizons. However, such products are likely more expensive than STLDIs that do allow for renewal. The less underwriting an insurer does the more actuarial risk it would take on, thus necessitating higher premiums. Consequently, it may be that the renewability provision increases enrollment in STLDIs over the long term, since it allows carriers to market to a wider swath of individuals. The exact number of people or number of issuers that would be interested in this more niche product is difficult to measure but directionally should increase enrollment in short term plans.

State Ramifications

A number of states have already implemented restrictions, and in some cases bans, on short term duration plans. Six states have restrictions that are as restrictive as or more restrictive than the original Federal regulation. Eleven more states have some form of restrictions, albeit less restrictive than the former Federal restrictions. The remaining states currently have no restrictions. How states regulate these plans will change over time. More states may react to negative coverage of underwriting or products without popular benefits (such as prescription drugs) and create new restrictions on STLDIs. Consequently, actuaries pricing for these plans or consumers purchasing these plans will need to be vigilant on the likely changing regulatory landscape.   This number may grow as several other states are also considering implementing restrictions.

Sign up for the
Wakely Wire,

our industry newsletter.