Escape from Obamacare

At least they have their health. When it comes to purchasing insurance through the Obamacare exchanges, young adults don’t have much else going for them.

Under Obamacare, young adults can buy a government-approved plan—with its mandated coverage of pediatric dental care, sterilization, and maternity care—and pay vastly inflated premiums relative to pre-Obamacare rates. Or they can simply go without insurance and pay the fine for violating Obamacare’s individual mandate—its unprecedented requirement that American citizens buy a product of the federal government’s choosing. If they pick the latter (more affordable) course, they’ll know they can always sign up for insurance during Obamacare’s next open enrollment period, no matter how sick or injured they might have gotten in the interim. Each of these choices is less appealing than the pre-Obamacare status quo.

But it turns out there’s a third choice. Policy experts Sean Parnell and Timothy Jost have noted a loophole in the law that could attract millions of young adults—and others as well—who seek inexpensive insurance. Indeed, this third way—short-term health insurance—could provide an affordable, low-risk escape route from Obamacare. In the vast majority of states, Americans can secure health insurance for a term of up to 11 months (and usually up to 364 days), which is more than enough time to get from one Obamacare open-enrollment period to the next.

Short-term insurance wasn’t generally a very attractive option pre-Obamacare. That’s because it provided coverage only during a finite term. If you contracted a serious illness, any treatment for that condition would be covered only until the policy term ended.

In their zeal to remake American medicine, however, the architects of Obamacare ignored the law of unintended consequences. One such consequence is that Obamacare has now transformed short-term insurance, a niche product that was never of much use to most people, into an attractive product—and into a very attractive way to circumvent Obamacare. The central planners have made the product’s key weakness—its failure to provide long-term protection—essentially irrelevant. Now the sick and injured can always purchase a policy covering preexisting conditions when a new Obamacare open-enrollment period rolls around, every 10 months.

As Jost (an Obama-care supporter) notes, Obamacare remakes the individual insurance market by amending the Public Health Service Act, a federal law from 1944 that defines different forms of health insurance coverage. Individual insurance coverage, that act states, is “health insurance coverage offered to individuals in the individual market, but does not include short-term limited duration insurance” (emphasis added).

In other words, short-term health insurance falls outside of the regulatory purview of Obamacare. While Obamacare prevents insurers from factoring a person’s health status or sex into the price of a policy—and severely limits their ability to account for a person’s age—short-term insurers remain free to set the prices of their policies according to actuarial tables. This greatly benefits the young, the particular victims of Obamacare’s price-hikes. And unlike Obamacare-compliant plans, short-term plans need not offer free contraceptives, abortifacients, or any of the other “essential health benefits” that Obamacare requires. In choosing a short-term plan, consumers need not purchase “benefits” they will never use.

Short-term plans generally operate on a fee-for-service model and therefore offer wide access to doctors and hospitals, in stark contrast with the narrow networks of Obamacare exchange plans. In addition, short-term plans are easy to apply for and require comparatively little paperwork. Best of all, prospective policyholders can compare and purchase short-term plans on user-friendly websites like eHealthInsurance.com, avoiding HealthCare.gov and its notorious flaws.

Free from the “community rating” and “essential health benefits” requirements that balloon the cost of Obamacare-compliant plans for young adults, short-term plans offer significant savings. Take, for example, a healthy 26-year-old man earning $35,000 in Milwaukee. According to a recent study of Obamacare’s premiums and subsidies completed by the 2017 Project, he could purchase the cheapest bronze-level Obamacare plan—which has a $6,300 deductible—for $2,343 a year. (He wouldn’t receive a taxpayer-funded subsidy.) Or he could select a 364-day short-term plan—with a $5,000 deductible—for just $759 annually. Even after paying his $253 fine for violating Obamacare’s individual mandate (short-term insurance isn’t Obama-care-approved), he’d be paying only $1,012, a savings of $1,331 versus Obamacare’s cheapest bronze plan.

Or take a healthy 31-year-old woman making $35,000 in Philadelphia. Again, according to the 2017 Project study, she could buy the cheapest bronze-level Obamacare plan for $2,586. (She too would get no subsidy.) Or she could buy a 364-day short-term plan—with wide-open doctor and hospital access and a $5,000 deductible—for just $1,070 annually. Adding in her Obamacare fine, she’d have to pay only $1,323—a savings of $1,263 versus Obamacare’s cheapest bronze plan.

By buying 364-day short-term plans extending from January 2 through December 31, the consumers in these examples would have coverage well into Obamacare’s next open-enrollment period—which runs from November 15, 2014 through January 15, 2015. If they remain healthy until that time, they could renew their short-term plans for the following year—or pick new ones. Or, if they’ve gotten sick or injured, they could jump ship to an expensive Obamacare plan, effective January 1, 2015. Even if they were to get sick or injured between December 15 and December 31 (in which case that new illness or injury wouldn’t be covered by a subsequent short-term plan), they could still enroll in a new Obamacare plan effective February 1, meaning their maximum coverage gap would be just one month.

This general approach would work in 33 states and the District of Columbia. In 13 other states, insurers don’t offer short-term plans spanning more than six months—whether by choice or because of state prohibitions. But they may start doing so soon, given such plans’ newfound attractiveness, and some states might help them. In Michigan, for example, the Republican-controlled statehouse might consider lifting the state’s existing six-month cap on such plans. Other states likely won’t prove so accommodating, including the four strongly left-leaning states (New Jersey, New York, Massachusetts, and Vermont) that have banned short-term plans outright.

For people living outside of such states, however, short-term plans offer an escape from Obamacare, courtesy of Obamacare.

Some on the left might be surprised that their favorite legislators failed to close such a loophole. Then again, sometimes you have to pass a law to find out what’s in it.

Jeffrey H. Anderson is executive director of the newly formed 2017 Project, which is working to advance a conservative reform agenda. Spencer Cowan is a research associate at the 2017 Project.