Houston, We Have a Problem

Short-term medical plans could be a bigger problem than people think.  Here’s the issue.  The Affordable Care Act (ACA) essentially sets a minimum threshold for health insurance policies (in terms of deductibles, anticipated coverage percentage, benefit levels, etc.).  This means a lot of people are seeing their current (noncompliant) policies canceled as it gets closer to the Jan. 1, 2014, start ACA date.  But the ACA threshold only applies to policies that are a year or longer.  So some insurance companies are issuing 364-day policies with much lower benefit levels, or policies that won’t cover anyone with pre-existing conditions (which ACA-compliant policies must do).

Policyholders will still have to pay the ACA mandate penalty, but at the amounts we’re talking about, the hypothetical Little Rock resident mentioned in the linked article above would save a little more than $1,400 in premiums over the course of the year. That means he or she would need to make more than $140,000 before the penalty exceeds his or her savings.  In subsequent years the increasing penalty cap (from 1 percent of income in 2014 to 2.5 percent in 2016) drops that break-even point to a little more than $56,000, but a lot of people make less than that.

So what’s the problem with all of this?  The ACA insurance policy minimums are there for a reason.  These short-term policies skirt that.  More importantly, as one commentator says in the article, there is a concern that short-term policies with a pre-existing condition exclusion will siphon off the younger and healthier people from the exchange marketplaces, essentially increasing costs for those people.  Basically, that ol’ health insurance death spiral again.

I think it might be even worse than that.  What does the healthy 25-year-old making $40,000 a year do on Day 365 when his short-term policy expires?  Probably renews it, right?  Even at 2016 penalty levels, it makes financial sense for him to do so.  But what does the 25-year-old making $40,000 a year who was diagnosed with cancer a few months back do when his 364-day policy expires?  Or the 30-year-old woman who just found out she’s pregnant?  Even if they were permitted to renew their short-term policies, don’t you think they will be tempted to trade up to the more generous ACA-compliant policies?

So it’s not just a case of these non-ACA policies taking out young and healthy people from the pool.  They’re doing that, then returning them to the ACA pool when they get sick or injured.  Sort of like a death spiral on steroids.  Stay tuned: Something has to give here.

Image courtesy of Flickr by NASA Goddard Space Flight Center