States Should Act to Avoid Insurance Market Disruption, Consumer Confusion Under New Rule

States should protect consumers from a new Trump Administration rule that expands health reimbursement arrangements (HRAs) — which, as we’ve explained, could raise individual market premiums and cause confusion and disruption for people with employer plans — by blocking or restricting substandard “short-term” health plans.

Short-term health plans, which last up to a year, were already set to proliferate under an earlier Trump Administration rule of last year. That’s a big problem because short-term plans don’t have to, and often don’t, cover all of the Affordable Care Act’s (ACA) essential health benefits, such as maternity and mental health care, substance use disorder treatment, and prescription drugs. They can deny coverage or charge higher prices to people with pre-existing conditions, and they typically don’t cover medical services related to a pre-existing condition. Because they cover limited benefits at lower cost, short-term plans lure healthy enrollees away from the individual and small-group markets and leave a costlier group behind, which raises premiums in those markets.

Fifteen states ban or sharply limit short-term plans. In many other states, nothing prevents the plans from skirting the ACA’s guarantees entirely. As we’ve written, more states should ban (or at least sharply restrict) such plans to mitigate harm to consumers and state insurance markets.

Now, the new HRA rule, which the Administration finalized last month, heightens the need for action because it dramatically expands the potential market for short-term plans, exposing more consumers to harm and increasing the risk to states’ ACA markets.

The HRA rule creates two new types of employer-funded, tax-advantaged accounts, each of which could fuel the growth of short-term plans. First, the rule lets employers forgo offering group coverage to some or all workers and instead lets them contribute to tax-free accounts that employees can use to help buy their own individual-market insurance. Although the rule says that consumers cannot pair these individual coverage HRAs with a short-term plan, they may be confused or misled into improperly enrolling in a short-term plan instead.

Second, the rule lets employers who offer group coverage set aside up to $1,800 per year in an “excepted benefits HRA” for employees to buy certain limited benefit coverage (such as a vision plan) or a short-term plan, along with or instead of comprehensive employer coverage. When employers contribute to an excepted benefits HRA, the contribution is deductible by the employer and tax free for the employee, giving short-term plans preferential tax treatment.

The HRA rule’s interaction with short-term plans exacerbates its potential harm to employees now covered by traditional group market plans and to people who need ACA market coverage.

• It makes more consumers susceptible to scams and other substandard coverage. The HRA rule dramatically expands the potential market for aggressive — and potentially deceptive — tactics that some insurance brokers are already using to enroll people in these high-commission short-term plans, instead of comprehensive individual coverage. If consumers with individual HRAs are misled into enrolling in short-term plans, they could be ineligible for the HRA reimbursement, unprotected against catastrophic health costs if they become seriously ill or injured, and, if they discover the error, unable to switch to a comprehensive individual market plan mid-year.

• It could drive large increases in individual market premiums. The Administration predicts that the HRA rule will have only small impacts on individual market premiums. But that’s because it assumes that if a firm replaces its traditional group health plan with an HRA, both sick and healthy workers will shift to the ACA market. If short-term plans instead siphon off some healthier workers, premiums in the ACA individual market could rise far more dramatically, making comprehensive coverage unaffordable for some people who need it.

• It could inflate small-group premiums. Similarly, if small employers set up excepted benefits HRAs for employees, the healthiest workers may choose a short-term plan instead of paying for group coverage. Premiums for small businesses don’t depend on their own workers’ health status, but they do depend on the risk pool across all small firms in their area. So if enough healthy workers drop their traditional group plans for newly subsidized short-term plans, premiums would rise across the market, according to actuaries and insurance regulators. As premiums rise and more healthy people leave, a state’s small-group market could deteriorate. The final rule lets states petition the federal Department of Health and Human Services to prevent small employers from reimbursing short-term plan premiums if they prove that small group premiums have risen because of it, but securing that approval seems challenging given the Administration’s push to expand short-term plans.

While states can’t do much to stop the spread of HRAs from hurting their insurance markets, they have far more authority when it comes to short-term plans. They can ban the plans or ensure that they last for no more than three months, as under prior federal rules. The HRA rule changes are just one more reason for states to rein in short-term plans.