The departments of Labor, Health and Human Services and Treasuryfinalized on Oct. 31 regulations proposed in June that limit theduration of so-called” short-term” insurance policies.

Under previous regulations, short-term policies – which aredesigned to provide medical coverage for individuals transitioningemployers and/or coverage– were limited to 12 months ofcoverage.

But beginning Jan. 1, 2017, short-term policies will be cappedat a maximum of three months' coverage. The departments also saidthey will not enforce the rule for 2017 policies with a 12-monthlimit that state regulators have already approved – as long as theyexpire by the end of 2017.

Steering healthy lives toward Obamacare

Despite the Affordable Care Act's individual mandate, say thedepartments, individuals are cutting their premium costs bypurchasing short-term policies and simply paying the IRS penaltycome tax time.

Short-term policies are exempt from the ACA's ban onpre-existing condition exclusions and prohibitions on lifetime andannual limits for essential coverage, which means they are cheaperthan even the most threadbare exchange-based offerings.

“In some instances, individuals are purchasing this coverage astheir primary form of health coverage and, contrary to the intentof the 12-month coverage limitation in the current definition ofshort-term, limited-duration insurance, some issuers are providingrenewals of the coverage that extend the duration beyond 12months,” the departments said in the final rule.

The rule's release comes at a time of intensified scrutiny forthe ACA. Exchange-wide premium hikes, coupled with an exodus ofmajor carriers from the exchanges and the near total failure ofnonprofit co-op health insurers, have heightened speculation thatPresident Obama's signature policy achievement has descended into adeath spiral.

Supporters of the ACA say that death spiral – in whichescalating premiums chase healthier lives from exchanges, leaving adisproportionate share of sick health care consumers who furtherdrive up premiums — is far from actually occurring.

Nonetheless, the new rule is clearly designed, in part, tore-capture healthier lives that have gravitated to short-termplans.

By universally limiting short-term policy duration to threemonths, the departments are gambling that the individual market'srisk pool will improve as healthier individuals who might otherwisepurchase short-term plans instead gravitate toward exchanges.

“Healthier individuals may be targeted for this type ofcoverage, thus adversely impacting the risk pool for AffordableCare Act-compliant coverage,” according to the rule.

Trend makes regulators'nervous'

In the rule, the agencies acknowledge that short-term policiesrepresent a small fraction of the health insurance market. Butsince the ACA's individual mandate requirement went into effect,the market for short-term policies has nearly doubled, according toestimates in the final rule: In 2013, $98 million in total premiumscovered about 80,400 lives; in 2015, $160 million in short-termpremiums covered about 148,000 lives.

That growth clearly caught the attention of regulators.

“I think they were seeing a trend that made them nervous,” saidTimothy Jost, an attorney and health law expert.

Jost sees some utility in short-term policies, but generallyagrees with the regulators' assessment that the short-term policymarket is showing symptoms of abuse.

Last April, the Wall Street Journal reported that several short-term policy brokers were seeing asurge in demand for these policies. A survey by online brokereHealth Inc., which fielded 147,000 applications for these policiesin 2015, said half of all consumers cited price as their reason forpurchasing the policies, while only 39 percent said they bought thepolicies because they needed temporary coverage.

The Journal also reported that Health Insurance Innovations, anonline marketer of voluntary and ancillary products, was looking toexpand its short-term policy business by making it easier forconsumers to automatically renew their contracts so they could keepthe policies for up to three years.

Jost, who also serves as a consumer liaison to the NationalAssociation of Insurance Commissioners, said carriers like BlueCross that continue to participate in the exchanges are supportiveof the new limits on short-term policies, given their exposure toexchange-based risk pools.

In its comment letter during the rulemaking process, NAIC wasone stakeholder that argued the three-month limitation was tooshort and could end up hurting consumers who need more time totransition between employers and plans, such as those with longerprobationary periods or a longer gap between employment.

But the departments reasoned that only a “small fraction” ofconsumers have purchased policies with limits of more than threemonths. Once the new rule takes effect, those using short-termpolicies to transition to a new plan can instead enroll in theexchanges, where regulators reason they will benefit from enhancedconsumer protections under ACA-qualified plans and avoid the taxpenalty of having no qualified coverage.

Rule's limited impact on riskpools

Joel White, president of the Council for Affordable HealthCoverage, a consortium of carriers and providers that advocates forlowering health care costs via greater market competition, doubtsthe new rule will benefit exchanges' risk pools, despiteregulators' claims.

“The agencies didn't provide empirical data to show any effecton the risk pool or any estimates of how the policy would affectplan choice and costs for consumers,” said White in an email.

The final rule only cites the Journal report showing a surge inshort-term policy demand – a trend that White said is due in largepart to the fact that many consumers, particularly those ineligiblefor subsidies, find the exchange's options to be unaffordable.

“We believe the regulation will not significantly and positivelyimpact the risk pool of the insurance exchanges,” said White.

Agencies punt on limiting fixedindemnity terms

In the proposed version of the rule, the agencies sought tofundamentally change how hospital indemnity and otherdisease-specific exempted voluntary polices are written.

The proposal required that those plans pay benefits on a per-dayor per-period basis, rather than on a per-service basis, as manyvoluntary indemnity policies are now written.

That would mean policies would pay a flat dollar amountregardless of the type of care or services received, explainedWhite.

But the final rule did not include the proposed revisions toindemnity policies. The departments did not explain why, but onlysaid, “The Departments may address this issue in future regulationsor guidance.”

One explanation for the agencies' reluctance comes from a rulingissued in July by the U.S. Court of Appeals for the District ofColumbia Circuit.

In Central United Life Insurance Co. v. Burwell, the D.C.appellate court unanimously upheld a lower court's decision thatthe HHS was guilty of statutory overreach in mandatingthat voluntary indemnity plans may only be sold to individuals withminimum essential coverage.

White suggested the Burwell ruling may have influenced thedepartments to withdraw their proposals limiting the ways in whichindemnity policies pay benefits.

“We hope the administration realized, in withdrawing thisprovision, that they lacked this authority – especiallyfollowing the D.C. Circuit Court of Appeals ruling,” said White.“We also hope that they realized their proposed regulation wouldhave eliminated nearly all fixed indemnity policies on the markettoday, cancelling coverage for nearly 49 million enrollees.”