Why Do Short-Term Health Insurance Plans Have Lower Premiums Than Plans That Comply with the ACA?

The Trump administration earlier this year issued a regulation that expands the availability of “short-term” health insurance plans that do not have to comply with any of the rules in the Affordable Care Act (ACA) for plans sold in the individual market. Specifically, the regulation allows short-term plans to be offered for up to 364 days and renewed at the discretion of the insurer for up to three years. Short-term plans are also expected to be more attractive now that ACA’s individual mandate penalty has been repealed, since people previously enrolling in these plans were liable for the penalty.

Short-term plans pose tradeoffs for consumers. On the one hand, they typically have substantially lower premiums than ACA plans. On the other hand, they exclude people with pre-existing conditions — an estimated 27% of all non-elderly adults — and offer more limited benefits than ACA plans.

In this analysis, we quantify the effects of the eligibility rules and more limited benefits generally found in short-term plans on the premiums in those plans. We estimate that by screening out people with pre-existing conditions and providing less comprehensive benefits, insurers may be able to offer short-term plans at premiums 54% lower than ACA-compliant plans.