Examining Plan B - Short Term Health Insurance Solutions To Long Term Unaffordability
The healthcare system is now at a breaking point. The ACA or Affordable Care Act is proving it is now created a situation that is unaffordable. Clients have been pushed into situations where they must make tough decisions as they are now unwilling or unable to make premium payments for plans they feel are too expensive or simply lack enough benefits for the cost. Many clients express what we've discussed for some time now that premiums are more than double what they used to pay and their deductibles are twice as high as well. Finally, because the expense is so high, many are trapped in plans that offer no benefits other than catastrophic coverage at a very high price. The truth is these clients are frustrated and searching for alternatives to their real financial problems. In the last month, Texas Health Design has had conversations about Short Term Health Insurance with more frequency and it is important to describe the benefits, limitations, and potential nasty pitfalls of this approach.
What is Short Term Health Insurance?
Short Term Health Insurance is basic health insurance that will cover policy holders for a defined period of time. Once the time period expires, the coverage is dropped and the holder of the policy must find new coverage elsewhere. Because the short term policy has a defined period of coverage, insurance companies limit their exposure to clients and can actuarially define their worst case risk exposure. Even if a client develops cancer or has a heart attack, the insurance company knows they do not have indefinite and unlimited financial risk, they know that the policy will terminate in less than a year. As a result of the limited loss potential and reduced benefits payable for additional services, short term policies are often much cheaper than the typical ACA compliant plan.
Fully Underwritten and Limited Benefits
The designs of the short term plans are similar to the "old days" where they cover a policy holder with more restrictive benefits. For example, the insurance company can exclude paying for preventative care, mental health services, and maternity. Longer term plans that offer coverage for more than one year must be ACA complaint and therefore must offer all of those services including the 10 Essential Health Benefits like preventative care, maternity, and mental health coverage. Significantly, these plans also typically limit the amount of money an insurance company must pay toward prescriptions, so annual limits must be a consideration in evaluating a short term plan. Finally, short term plans are fully underwritten. Only healthy people can obtain short term plans because the insurance company can pick and choose the type of applicants they want to accept. If you have serious medical issues or have had major health concerns in the past, you are very likely to be declined in the application process.
Why Would Anyone Want A Short Term Plan?
Given the limited benefits and the full underwriting why would anyone want a short term plan? The answer is simple. Price! Short Term Plans are more affordable and they really are intended to cover a client for catastrophic health problems like an accident or unexpected illness. These plans can be 50% cheaper than their ACA counterparts and often are the prescription that most clients are looking for. In addition to being affordable, the plans only come with deductibles as high as $2,500 and often have $1,000 co-insurance or sharing after the deductible is met, thus creating a plan that has a lower out of pocket cost than the ACA alternative. For this reason, many clients like these plans as a lower deductible alternative to ACA plans.
We visited with a family of three yesterday that is an existing client. The family consists of a husband and wife who are 40 years old and a small child. These clients are middle class earners and currently have the Blue Cross PPO 002 which is a great ACA plan with a $1,500 deductible. Their monthly premium is around $1,075 per month. Last year, all three of these clients went to their physician one time total. Clearly, $12,000 in premium is a lot to pay to cover a doctor visit for a sore throat! We could argue that they should have gone to the doctor to get their annual physicals and had a checkup, but the bottom line is that they are a typical healty and busy family that doesn't consume many healthcare services. Part of our annual process is to examine alternatives with each client and upon hearing how little the plan was used we mentioned the availability of other ACA plans with higher deductibles and fewer benefits and also discussed the option of transitioning to a short term plan. In this family's case, a $2,000 deductible short term plan with Blue Cross would cost them $426 a month. This is a significant savings. If the client needed to go to the doctor for a sore throat using this approach, he wouldn't have the luxury of a $30 co-pay, but he would save almost $600 a month in premiums! Obviously they are healthy and this approach may work for them, but every situation is different so we must make sure that the way they use coverage and their pre-existing health issues will match the benefits a short term plan might provide. Want a short term plan quote? Contact Texas Health Design at 713-422-2935 today.
What's the Catch? Tax Penalties and Time Limits
Everything sounded great but you knew there had to be a catch right? The short-term plan is not ACA complaint and therefore does not meet the criteria to allow clients to avoid paying a tax penalty for not having qualified health plan coverage. In 2015 clients that do not have an ACA compliant plan will pay up to 2% of their household income in penalties! In 2016 the penalty will increase to 2.5% of income.
Example of Approximate Penalty For 2015- (the penalty below is overstated slightly to ensure we are conservative and help you understand the significance of the penalty).
$100,000 Family Income - Penalty is approximately $2,000 for the household
$70,000 Family Income - Penalty is approximately $1,400 for the household
In the example above the short term policy was only $426 a month, but we must add the tax penalty to the annual premium to ensure we are comparing apples to apples and analyzing the full cost of both approaches. Our client makes about $100,000 a year, so his real cost for choosing the short term route would be around $626 a month when you add the premium and the tax penalty for his family.
Finally, short term plans also only cover a family for up to 11 months. If our client obtained the short term plan, he will need to purchase a new plan by December 31st of 2015 because his family will lose their coverage.
Is Short Term Coverage The Best Approach?
Each family may find a different answer in their analysis as the best way to approach their health insurance needs. Short Term health plans are more affordable, but they carry with them the risk of tax penalties, limitations, exclusions, and also a future termination date. High earners will quickly find that the tax penalty is so onerous that it makes the decision to obtain a short term plan uneconomical. Let us help you analyze your family's situation and we'll help you find the best plan at the best price. Click Contact Us today!
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