Recent federal actions have created the potential for instability in the individual health insurance market, through which approximately 18 million Americans currently purchase their health insurance coverage. 1 In October 2017, President Trump issued an executive order to encourage the sale of health insurance products that do not comply with the consumer protections of the Affordable Care Act (ACA). 2 In December, Congress repealed, effective in 2019, the tax penalty for individuals who can afford to maintain health insurance coverage but decline to do so (the individual mandate penalty). 3
Prior to health reform, insurers in the individual market had wide latitude to deny coverage, charge an unaffordable premium, or limit benefits based on a person’s medical history. As a consequence, individual market health insurance routinely proved inadequate for consumers’ health and financial needs and was often inaccessible to those with even minor health problems. 4 The ACA established numerous consumer protections designed to make it easier for consumers in the individual market to access affordable, adequate health insurance. The law requires insurers that sell individual health insurance to offer coverage to all individuals regardless of health status, requires coverage of preexisting conditions, and prohibits insurers from charging higher premiums based on a person’s medical history or gender. It also includes limits on cost-sharing and requires insurers to cover a minimum set of essential health benefits, including coverage for mental and behavioral health care, prescription drugs, and maternity services.
For these consumer protections to work as intended and to keep premiums affordable, they need to be paired with policies that encourage a broad and balanced risk pool. To promote continuous enrollment by the sick and healthy alike, the ACA imposes an individual mandate and provides financial assistance to make coverage more affordable for those with lower and moderate incomes. Importantly, the ACA also defines what types of coverage were sufficiently protective for purposes of satisfying the individual mandate. To prevent cherry-picking of individuals who are low health risks, it also requires all individual market insurers to play by the same rules.
In many ways, the ACA’s regulatory approach to the individual market has proven successful. During the most recent open enrollment period, approximately 11.7 million Americans signed up for coverage through the ACA marketplaces (also called exchanges), most of whom are eligible for subsidies to help with the cost of coverage. 5 In turn, improved access to comprehensive individual health insurance under the ACA, along with the expansion of Medicaid, has helped to reduce the uninsured rate by a third, as of 2018, and lower consumers’ average out-of-pocket costs. 6 And, despite insurers’ continued uncertainty over the possible repeal of the health law and the Trump administration’s approach to implementing the ACA, analysis showed that, on average, states’ individual markets were stabilizing, with some insurers reaching profitability. 7
However, challenges remain. In the past two years, the individual market in most states has seen significant increases in premiums, coupled with decreases in the number of participating insurers. 8 While the ACA’s premium subsidies insulate many consumers from these price hikes, many millions of consumers are not eligible for subsidies, and those individuals identify the cost of coverage as a significant barrier to care. 9 And though marketplace sign-ups remain stable despite federal policy uncertainty and Trump administration actions seen as undermining the ACA, enrollment remains well below early expectations. 10
These challenges are interrelated and can be attributed to many factors. Still, the availability of coverage options that are not compliant with the ACA’s rules, as well as confusion over them, likely has played an important contributing role (Exhibit 1). 11
In general, “alternative coverage arrangements” sit outside the individual market risk pool and do not have to meet many — or sometimes, any — of the federal consumer protections that otherwise apply to individual health insurance (Exhibit 2). While these arrangements may be appealing to some healthy consumers, particularly because of their generally low upfront cost, they are typically far less protective than coverage compliant with the ACA and therefore less attractive, and less accessible, to individuals who believe they will need medical care. These coverage products siphon off healthy individuals who otherwise likely would have obtained insurance in the ACA-compliant individual market. As a result, they contribute to a smaller and relatively sicker risk pool in that market, with higher premiums and fewer plan choices for the consumers who remain. Although states have broad authority and ability to regulate these coverage arrangements, most generally do not.
Some of these coverage options, including short-term policies, health care sharing ministries, and other insurance-like arrangements, such as discount cards and direct primary care contracts, were generally not considered individual market health insurance prior to the ACA and were not brought within the federal definition by the health law. Others, including “grandfathered” and “grandmothered” (or transitional) plans, are a product of the ACA or of its implementation. Association health plans (AHPs) predate the ACA. Shortly after the health law was enacted, federal regulators affirmed that such plans are generally treated as individual market coverage, subject to all individual market protections, if the plans are sold to individuals. The Trump administration, however, has proposed a reinterpretation of federal law that would exempt certain AHPs from many individual market protections, even when marketed to individuals.
The administration’s actions to further encourage the availability of non-ACA-compliant polices, along with the loss of the individual mandate penalty, have sparked interest in how these alternative coverage arrangements are regulated at the state level. To inform state policymakers who are exploring opportunities to stabilize their risk pool, we identify and describe a number of alternative coverage options that are likely to threaten the individual market risk pool. We also examine the legal framework within which these arrangements are currently regulated, both federally and in each of the states.
Although the ACA required all nongrandfathered individual insurance policies to comply with its insurance market reforms by 2014, millions of consumers were permitted to remain in coverage that failed to meet core ACA standards. 12 In late 2013, insurers began to discontinue health coverage for people enrolled in plans that were neither grandfathered under the health law nor compliant with ACA protections slated to take effect in 2014. While these transitional or grandmothered plans postdated the ACA’s enactment and therefore complied with the first wave of reforms effective in 2010, they did not meet the law’s more rigorous 2014 standards. These included a ban on preexisting condition exclusions, a prohibition on the consideration of health status and gender when setting premiums, and a requirement to cover a minimum set of essential health benefits (Exhibit 2).
To provide transitional relief for consumers who preferred to keep their coverage, the Obama administration instituted a policy in late 2013 that paved the way for individuals to renew their noncompliant plans for up to two additional years, without running afoul of the individual mandate. 13 Since then, federal officials have repeatedly extended this policy — most recently in February 2017 — and enrollment in transitional plans is now permitted through the end of 2018. 14
Importantly, federal officials have never required the continuation of grandmothered plans. Rather, the policy regarding transitional plans gives states the choice of whether to allow renewal of the noncompliant coverage. Insurers, in turn, must decide whether to continue to offer such plans if the state has provided the option.
Most states initially allowed the renewal of transitional plans at insurers’ discretion and have continued to do so. 15 By January 2018, grandmothered plans were still permitted in 36 states, including most states that rely on the federal government to operate their ACA marketplace (Exhibit 3). By contrast, of the 14 states that prohibit noncompliant coverage, 13 manage their own health insurance exchange. (The District of Columbia also operates its own marketplace and bars transitional plans.)
State decisions to allow grandmothered plans have had significant consequences. People who enrolled in and retained transitional coverage have tended to be healthier than those in the ACA-compliant market, for several reasons. First, such individuals likely passed medical underwriting when they initially bought coverage, before that practice was banned by the ACA. Second, because transitional policies offer fewer benefit and cost protections and, consequently, are cheaper than ACA-compliant coverage, they are more likely to retain enrollees who are younger or have limited care needs. By contrast, those with higher care utilization are more likely to migrate to more comprehensive plans that meet ACA standards. In states that have permitted it, this policy generally has contributed to a segmented market, where relatively healthy, low-cost consumers have remained outside the ACA-compliant risk pool. This has made that market relatively sicker and less stable. 16
Short-term plans are designed to provide protection when a person experiences a temporary gap in comprehensive coverage, such as when transitioning between jobs. These plans, which predate the ACA, are not considered to be individual health insurance under federal law and are exempt from the ACA’s consumer protections (Exhibit 2). 17 Consequently, short-term plans typically provide coverage far skimpier than ACA-compliant policies: they may decline to cover preexisting conditions, exclude health benefits such as preventive services, maternity care, and mental health and substance use services, and impose dollar limits on coverage. However, low premiums may make these policies attractive to healthy consumers. And they are much more profitable for insurers than coverage that meets federal consumer protections.
After receiving reports that many individuals had begun to rely on short-term policies as a primary form of coverage, and not just as a gap-filler, the Obama administration issued new regulations in 2016. These limited the duration of short-term policies to less than three months and prohibited the policies from being renewed. 18 However, recently proposed regulations would reverse course and, subject to state law, allow short-term plans to last for up to 12 months and be more easily renewed or extended. 19
Current state laws and regulations governing these products vary widely (Exhibit 4). Massachusetts, New Jersey, and New York apply extensive consumer protections, including guaranteed issue, to all new policies in the individual market, foreclosing underwritten short-term plans in these states. 20
In the remaining 47 states and the District of Columbia, insurers may refuse to issue a short-term policy — or to renew a policy when an existing contract term ends — on the basis of a consumer’s health status. Insurers generally are not limited as to the factors they may consider when setting premiums and are not required to cover essential health benefits. Only six of these 47 states limit the initial contract duration of short-term plans to fewer than 12 months (the proposed federal standard) and restrict the sale of multiple consecutive short-term plans. 21
Six other states similarly limit initial contract duration; however, they do not prohibit insurers from selling multiple consecutive short-term plans, essentially allowing a loophole to the limit on contract duration. 22 While 35 states and the District of Columbia require short-term plans to cover at least one state benefit mandate, none of them require short-term policies to cover all essential health benefits.
Limits on contract duration and requirements to cover some mandates have not diminished the availability of short-term policies in most states. These policies appear to be marketed in most states, aside from those that prohibit the sale of underwritten short-term policies. 23 However, at least in one state, Rhode Island, the imposition of other regulatory requirements have, as a practical matter, limited the availability of short-term plans. Rhode Island applies some consumer protections, including a prohibition on preexisting conditions and medical loss ratio requirements, to short-term policies. 24 A review of broker websites in that state suggests that, as a result, short-term policies are not being marketed there.
Allowing the unfettered sale of short-term plans puts enrollees at financial risk and weakens the individual insurance market. Because plans do not have to adhere to the ACA’s consumer protections, benefits are generally quite limited, and enrollees may find themselves without coverage for services they need. 25 Depending on the state, those who do secure a policy may be at risk of having claims denied because of a preexisting condition or their policy rescinded because of post–claims underwriting. 26 The combination of limited benefits and relatively low premium costs enables short-term plans to siphon off healthy individuals from the individual marketplaces. This, in turn, leads to higher premiums and fewer choices for consumers seeking comprehensive plans. 27
Enrollment in short-term policies was increasing prior to the 2016 federal regulations limiting their duration and renewal. Applications for short-term policies sold through e-Health, a large online broker, more than doubled between 2013 and 2014. 28 According to data reported to the National Association of Insurance Commissioners (NAIC), there were about 160,000 people covered by short-term policies at the end of December 2016. 29 However, this count may significantly underestimate actual take-up: recent reports have suggested enrollment may be closer to a million. 30 In addition, sellers of short-term policies or similar policies may file their plans with insurance departments under other categories of coverage that may not be reflected in the reported data. If the proposed regulatory changes are finalized, enrollment in short-term plans is projected to expand to 4.2 million people. 31
Earlier this year, the Trump administration issued a proposed regulation that would make it easier for self-employed individuals and small businesses to purchase health insurance across state lines through association health plans, such as those offered by a professional or trade association. 32 Under federal law, AHPs generally would be treated as large-employer health plans and would not have to comply with the market standards and consumer protections that otherwise apply to the individual market, including coverage of essential health benefits (Exhibit 2).
This proposed federal approach to AHPs is a departure from how health insurance sold through associations is regulated today. Under current federal law, association coverage does not exist as a distinct category of health insurance. The general rule is that health insurance policies sold through an association to individuals are regulated under the same federal standards that apply to the individual market. 33 Following implementation of this “look through” approach to regulating AHPs, insurer interest in marketing health insurance to individuals through associations largely fell off in many states. 34 In states like Vermont, which had a significant AHP market prior to the ACA, this federal interpretation, coupled with state action, shifted AHPs into the ACA-compliant market, resulting in greater stability. 35
Although it is difficult to estimate how much the AHP market would grow under the proposed federal framework, there was a sizable AHP market in some states prior to the ACA. 36 Often, states regulated coverage sold through AHPs differently from coverage in the traditional individual and small-group markets, and these regulatory differences served as powerful incentives for insurers to market AHP coverage to small businesses and the self-employed. 37 For example, in 2011, state regulators in Wisconsin estimated that 30 percent of insurance in the individual market was sold through an association. 38 In Ohio, approximately 72 percent of individual market coverage was written “via association business.” 39
Considering the interest in AHP coverage prior to the ACA and the significant regulatory incentives offered to AHPs under the proposed federal framework, there are indications that this market will reemerge. They are bolstered by recent statements by national insurers, such as UnitedHealthcare and Anthem, that they are interested in marketing association coverage. 40
By creating an uneven playing field for AHPs to compete with ACA-compliant individual insurance products, the proposed federal framework could have a negative impact on the individual market risk pool. 41 In a recent analysis, it was reported that 31 percent of individuals with nongroup coverage are self-employed. 42 If a sizable and healthier component of this population gravitates toward lower-cost, less protective AHP coverage, it could leave the individual market risk pool sicker and smaller. Over the long term, this could raise premiums and reduce plan options in the ACA-compliant market. 43 It has happened before. In the mid-1990s, AHPs in Kentucky were exempted from benefit and rating requirements that applied to the traditional individual and small-group markets. Insurers abandoned the traditional markets and healthy consumers shifted to AHPs, with premiums dramatically increasing for those left behind. 44
The impact of the Trump administration’s AHP proposal on the individual market remains uncertain. It will likely depend on the leeway AHPs are afforded in marketing to the self-employed and using members’ health status to determine eligibility, premiums, and benefits. Perhaps most critically, however, the proposal’s effects will depend on whether states will continue to have broad authority to regulate AHPs to ensure a level playing field across their markets.
Health care sharing ministries (HCSMs) are entities whose members share a common set of religious beliefs and contribute funds to pay for the qualifying medical expenses of other members. 45 Members must generally pledge to follow religious principles and pay a monthly “share” that may vary based on age and level of coverage. 46 The HCSM either matches paying members directly with those who have health costs deemed eligible for help, or collects the shares to disburse to members in need. HCSMs take the position that, because they do not guarantee payment for member claims, they do not constitute insurance. 47 The arrangements are not regulated as insurance under federal law and do not comply with the ACA’s consumer protections (Exhibit 2).
The ACA exempts members of HCSMs from the federal individual mandate, a fact advertised by sponsors of these arrangements in the marketing materials provided to prospective members. 48 Federal law does not, however, dictate whether and how states may regulate these entities. In 30 states, legislatures have chosen to enact “safe harbor” rules that exempt HCSMs from state insurance regulation, provided they meet certain criteria (Exhibit 5). Many of these provisions have been adopted since the ACA’s passage and, in some cases, in response to efforts by regulators to conduct oversight of these arrangements. 49
In states with a safe harbor, insurance regulators are generally barred from requiring HCSMs to meet standards and requirements, such as those governing benefits, premium rates, licensure, solvency, and oversight, applicable to health insurers and the products they offer. However, the states that have not enacted a safe harbor rarely regulate HCSMs as insurers either. For example, Montana’s regulator welcomed back one ministry previously barred from offering memberships in that state when a judge ruled that the HCSM was issuing insurance contracts without an insurance license. That ruling prompted a consent agreement whereby the HCSM agreed to refrain from doing business in the state unless it received a certificate of authority. 50
Nevertheless, many aspects of HCSM arrangements resemble traditional insurance, according to a review of the three largest ministries. 51 In addition to paying a monthly share (akin to a premium), members typically must cover, out of pocket, the “unshareable” amount of a medical cost (similar to a deductible) and may be responsible for a coshare amount up to a financial cap. Limits on care costs deemed “shareable” by the HCSM range from $4,000 to $500,000, depending on the plan, and, in the case of at least one HCSM, may be reduced, increasing a consumer’s financial exposure, if “needs” exceed “shares.” 52 Some HCSMs also utilize a network of providers or help members negotiate discounts with providers, and some require members to pay program fees or a portion of their share directly to the HCSM itself to cover administrative costs. Some also pay commissions to brokers that sell memberships in the ministry. 53
The HCSMs we reviewed exclude or strictly limit coverage for preexisting conditions. For example, under one HCSM, for medical costs associated with a condition to be eligible for sharing, the member must be symptom-free for one to five years prior to enrolling. Others apply stricter dollar limits to preexisting conditions, depending on how long the member has been symptom-free and gone without treatment. 54 HCSMs are not obligated to cover a minimum set of health benefits, and some services are routinely excluded from sharing. Birth control, mental health services, routine care, preventive services, prescription drugs (except in limited circumstances), and services to treat developmental delays fall outside guidelines for shareable expenses in the three ministries reviewed. 55
Membership in HCSMs has spiked since enactment of the ACA, growing, by some estimates, from fewer than 200,000 members prior to 2010 to about 1 million. 56 State regulators have noted the growth in membership, often among those who do not qualify for marketplace subsidies. 57 Marketing materials also promote HCSMs as a way for people to send monthly payments directly to someone with similar values, rather than to an insurance company.
But HCSM coverage leaves members at risk of substantial out-of-pocket costs for conditions either not covered or covered only up to a cap. Moreover, because HCSMs do not promise that members’ care costs will be paid, and are not subject to rules designed to ensure sufficient funds to cover claims, members face a greater risk that even eligible spending will not be reimbursed. And consumers living in the 30 safe-harbor states cannot count on help from their regulators when costs are only partially paid because of inadequate shares or are deemed ineligible for sharing. As with other arrangements that pair a low monthly payment with a plan that limits benefits for people in less-than-perfect health, the design of HCSMs encourages selection against the ACA-compliant market.
In addition to the arrangements discussed above, many companies sell consumers other types of health coverage products that do not provide comprehensive protection in the case of an unexpected medical event and are not required to comply with the ACA’s individual market insurance reforms. Nonetheless, these products are sometimes marketed as alternatives to major medical coverage. 58 State regulation of these products varies but can play a critical role in protecting consumers from financial risk and helping to stabilize the individual market.
A direct primary care agreement is a contract between a primary care provider (PCP) and a consumer under which the consumer pays a periodic membership fee directly to the PCP and the PCP agrees to provide, at no extra cost, services within the scope of primary care practice, which in some cases includes management of chronic diseases. The agreement typically does not include coverage of prescription drugs, specialty care services, hospitalization, or most other benefits provided by a major medical insurance policy.
In the past few years, a number of states have either adopted or proposed legislation declaring that these arrangements are not insurance and therefore are not subject to state insurance laws. 59 However, these arrangements may cross the line into insurance if, for example, the practice takes on health care risk by allowing unlimited office visits for a flat fee or charges monthly fees that are less than the fair market value of the covered services. 60 Even in states that do not exempt direct primary care contracts from regulation under the insurance code, few insurance departments actively regulate these arrangements. In either case, when states do not conduct oversight of insurance or insurance-like products, consumers may find they have limited recourse if they have a complaint or if the provider goes out of business and cannot refund fees.
Discount medical cards offer purchasers discounts for certain medical care, goods, and services. Discount cards offered only for prescription drugs are common. In general, consumers pay a onetime enrollment charge plus monthly fees. In return, the card issuer pledges to give the purchaser discounts on covered medical services. However, in many cases, the “discounted” charges are no better than what consumers could negotiate on their own. 61
Reports of significant marketing abuses by discount card sellers led the NAIC to develop a model state law and many states to enact consumer legislation. 62 For example, the NAIC model requires discount card companies to register with the state or obtain a license. It authorizes the insurance department to conduct investigations of discount card sellers, impose financial penalties, or undertake other enforcement actions when appropriate. The model law also restricts deceptive marketing tactics and requires the submission of provider contracts and up-to-date provider lists. According to NAIC, an estimated 21 states have implemented its model or some variation thereof. 63
The sellers of bundled products package together several types of coverage that, sold separately, would not be considered major medical coverage. While the products vary, they often combine a fixed indemnity policy that covers a set dollar amount for each day the consumer is in the hospital, a limited prescription drug benefit (often a discount card), and a policy that will cover a limited number of physician office visits each year. Some also may include accident-only coverage or coverage for a specified disease, such as cancer. 64 Because each policy on its own is not considered major medical coverage, these bundled products are not subject to the federal standards that apply to individual health insurance plans, including underwriting restrictions and prohibitions of preexisting-condition exclusions.
Companies market these products as a more affordable alternative to an ACA-compliant plan. But consumers face considerably greater financial risk if they have an unexpected medical event, and those with health conditions may be denied a policy or find that services to treat their needs are not covered. 65
States have broad authority to set minimum standards for these products and regulate their marketing and sale. However, most state regulations do little more than establish minimal benefit standards and consumer disclosure requirements. Many of these are laid out in an NAIC model state law and model state regulation, adopted in 28 states. 66 However, there are a few exceptions. Minnesota, for example, requires companies to secure a consumer’s attestation that she has underlying major medical coverage before she can enroll in a fixed-indemnity product. 67
Although states’ approaches to implementing the ACA can sharply differ, the law’s consumer protections operate nationwide, and nearly all states have taken responsibility for enforcing these reforms in their jurisdictions. The insurance exchanges in most states have proven resilient in the face of significant change and uncertainty, with millions of Americans now able to depend on individual health insurance to protect them both medically and financially.
However, maintaining a stable individual market will become more challenging, thanks to an environment in which healthy consumers are not required to maintain insurance and federal regulations are loosened to promote coverage arrangements likely to weaken insurance risk pools and raise premiums. These developments may incline healthy individuals to look increasingly outside the compliant market for coverage, leaving those who remain to face higher costs and fewer plan choices. 68
Based on our review of state laws and standards, it appears that no state maintains a regulatory environment that fully protects its individual health insurance market from being undermined by the alternative coverage options we have identified. However, states continue to be the primary regulators of private health insurance. Although the ACA set a federal floor of consumer protections for insurers that operate in the individual market, it did not curtail states’ power to regulate above these minimum standards and to exercise full authority over coverage arrangements that fall outside the scope of federal insurance law.
This analysis is based on a review of applicable laws, regulations, and guidance enacted or promulgated prior to February 1, 2018, by each of the 50 states and the District of Columbia. This review was supplemented by correspondence with state regulators in 49 states and the District of Columbia.
A number of states have taken steps to limit the availability of non-ACA-compliant products and protect against adverse selection. Massachusetts and New York promptly discontinued transitional coverage and effectively prohibit underwritten short-term policies, while several other states tightly restrict the duration of such plans. Significantly, Massachusetts also has its own individual mandate, requiring state residents to maintain coverage that meets minimum standards. 69 Other states have begun to explore enactment of similar policies in anticipation of the federal mandate’s 2019 repeal.
On many fronts, states face a federal regulatory approach to the individual market that is significantly different from what was originally envisioned under the Affordable Care Act. In light of these changed circumstances, there may be value for states in considering regulatory options for protecting their individual insurance markets and their insured beneficiaries from the detrimental effects of non-ACA-compliant policies. The decisions states make will likely have a significant impact on their residents’ access to adequate and affordable coverage and on the stability of their individual health insurance markets.
The authors thank the state insurance regulators who shared their time and valuable insights with us. We are also grateful to Linda Blumberg, Christina Goe, Tim Jost, Jon Kingsdale, and Sarah Lueck for their thoughtful review.
