How Short-Term Health Insurance Plans Work

What is short-term health insurance?

Short-term health insurance plans only offer a limited range of benefits and are limited in duration, and they cover unexpected accidents and illnesses. Short-term health plans are exempt from the Affordable Care Act (ACA) and, as such, they aren't required to provide the essential health benefits that ACA-regulated plans must cover. In terms of benefits, most short-term plans offer some coverage for inpatient and emergency care, surgery, labs, imaging, and a limited number of outpatient office visits. Short-term plans often do not cover maternity care, mental health care, or outpatient prescription drugs, and they typically last for a period of 364 days. They generally don't cover pre-existing conditions and your application for such a plan can be denied based on your medical history.

Short-term health policies can be sold with deductibles and out-of-pocket limits well above the ACA's mandated amounts. Also, under short-term plans, the total dollar amount of benefits is capped.

Fixed indemnity plans vs. short-term health insurance

Fixed indemnity plans are often confused with short-term health plans, but there is a key difference between the two. While short-term health plans are intended to provide stand-alone coverage for a short period of time, fixed indemnity plans are generally meant to serve as supplemental coverage; they're designed to reimburse a set amount of money when a policyholder has various covered expenses. For example, such a fixed indemnity plan might pay $1,500 when the insured spends a night in the hospital, or $1,200 if they have surgery, regardless of what the actual bill is.

How to get short-term health insurance

Being uninsured for a significant length of time is risky, and having health insurance is a key part of a smart overall financial strategy. But getting coverage under an ACA-compliant plan may be more coverage than you want and more expensive than you can afford. There are a variety of scenarios in which short-term plans may make sense, including:

You missed open enrollment

Open enrollment for individual medical plans runs from November 1 to December 15 in most states. Employer-sponsored health plans also have annual open enrollment periods. If you missed open enrollment and don't have a qualifying event that grants you a special enrollment period, you won't be able to enroll until the following year.

But short-term health plans are available year-round. You can apply anytime, with a coverage effective date as soon as the day after you apply—and the application process is fairly quick and simple. Just keep in mind that medical underwriting applies, meaning pre-existing conditions generally aren't covered. The insurer can reject your application if you have certain medical conditions that aren't compatible with their underwriting rules.

You're covering a gap before your regular health insurance becomes effective or you have a gap between your employer provided health insurance and when you are eligible for Medicare.

Although short-term health plans can take effect as soon as the day after you enroll, that's not the case with regular major medical coverage. With regular insurance, effective date rules vary depending on the type of coverage and whether you're enrolling during open enrollment or a special enrollment period, but there's generally a gap between when you enroll and when the coverage takes effect.

For example, if you sign up for an ACA-compliant individual market plan on November 1—the first day of open enrollment in nearly every state—you'll have to wait a full two months until your coverage takes effect on January 1. A short-term plan can be a perfect solution to bridge that gap.

Similarly, you can enroll in Medicare up to three months before you turn 65, but the coverage won't take effect until the month you turn 65. Some people opt for short-term coverage in the months leading up to Medicare, knowing they'll be able to transition to Medicare once they're 65.

You have to pay the full cost of your own coverage

Most Americans get significant assistance in paying for their health coverage. Medicare and Medicaid are both heavily subsidized by the government. According to the Kaiser Family Foundation   PDF Opens in new window's 2018 Employer Health Benefits Survey, employers cover an average of nearly 72% of the total cost of health insurance premiums for workers with family coverage under an employer-sponsored health plan. Also according to the Kaiser Family Foundation, only about 7% of Americans bought their own health insurance in 2017, and the majority are eligible for premium subsidies under the ACA.

But what if you're among the group of people without access to any sort of financial assistance in purchasing health insurance? Depending on how much you earn, buying your own individual ACA-compliant health plan might be too costly for your budget. This could be the case if you earn just a little more than four times the poverty level, which is the upper limit for premium subsidy eligibility. It could also be the case if you're caught in the ACA's "family glitch"—if your employer-sponsored plan is affordable individually but not for family members, yet it prevents your family from qualifying for premium subsidies in the individual market.

In these situations, selecting the best short-term health insurance plan in your area might be a practical option. A short-term plan, even with a fairly low deductible, will generally be much less expensive than a full-price ACA-compliant health plan. It's important to understand that this is because the coverage is more limited and the plan uses medical underwriting; enrollees tend to be fairly healthy, and even when they do have pre-existing conditions, the insurer doesn't cover treatment for those conditions. This helps keep the premium costs of the short-term health plans down. Because these short term health plans offer only limited coverage it is important to carefully consider the details and understand what you're purchasing before buying a short-term plan.

Shopping for a short-term plan? Here's what you need to understand

When evaluating short-term plans or comparing them with options from your employer or the regular individual market, keep these tips in mind:

• Check if the plans are offered in your state: In some states, short-term plans are not allowed or offered. Duration and whether you can renew your plan or buy a new one after expiration depend on your plan of choice and your state’s laws.
• Compare total costs: Look at the plans side by side, including coverage, exclusions, premiums, deductibles and out-of-pocket limits—and familiarize yourself with health insurance terminology before you start comparing plans. Pay attention to how the short-term plan counts out-of-pocket costs; in many cases, the out-of-pocket limit is in addition to the deductible, whereas ACA-compliant plans have an out-of-pocket maximum that includes the deductible. Be sure you also understand any benefit caps that apply, including limits on the number of covered visits to a medical provider or the total amount the plan will pay.
• Carefully read the exclusions: Pay attention to the details of any short-term plans you're considering. Does the plan say prescription drugs are covered but only for inpatient situations? That might sound fine, but consider what you'd do if you were diagnosed with a serious condition that required costly outpatient prescription drugs. Does the plan not cover maternity care, or limit office visit coverage to just one or two visits? Again, these provisions might align with your coverage needs, but make sure you fully understand them before you enroll—not when you're pulling up to the hospital.
• Plan ahead for the termination of your short-term policy: Depending on where you live, you might be able to buy a short-term plan that's renewable for a total duration of up to three years. But in many areas, short-term plans only offer coverage for up to three or six months, and you'd have to reapply for a new policy after the first one ends, with new medical underwriting. Note that the termination of a short-term plan doesn't trigger a special enrollment period in the standard individual market, so if you intend to transition to an ACA-compliant plan you'll need to do so during open enrollment.
• Disadvantages of short-term health insurance: Since benefits are limited, short-term health insurance likely won’t cover prescription drugs or maternity care. Plans are also non-renewable, so if you extend your coverage after it expires, you’ll need to complete the application process all over again.

One way or another, your financial plan Opens in new window should include continuous health coverage. And while a short-term plan can be a good way to avoid being uninsured for short stretches of time, you should ultimately have a long-term solution in mind.

Footnotes

Louise Norris has been writing about health insurance and health care reform since 2006.

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