Short Term Medical: A Remedy to Rising Health Insurance Costs?

Short term medical (STM) insurance has long been considered a viable alternative for individuals who are temporarily without health insurance for a short period of time.

The market has included students, those waiting for their employer-sponsored plans to begin, or as an alternative to COBRA. In addition, many non-U.S. citizens buy this type of coverage when they are here on an approved visa.

But a new market is emerging: short term medical insurance is increasingly being bought as an affordable alternative to Obamacare health insurance. Some experts suggest more than two million Americans are covered by STM, and that amount is growing quickly.

If you have short term medical insurance do you have to pay a tax penalty? These plans do not meet the coverage standards of the Affordable Care Act. Thus, if you purchase an STM plan you are considered “uninsured” and would still need to pay the tax penalty for not having coverage. The penalty is the greater of $695 per individual or 2.5% of your taxable income. Ouch.

And many plans will pay only up to $1 million in lifetime medical expenses and do not provide coverage for certain wellness benefits and other procedures. More ouch!

Finally, the plans are restricted to individuals in generally good health, and they won’t cover pre-existing medical conditions. A big pain!!

Are there cheaper ways to get health insurance than Obamacare? For many, the math works. For example, a 35-year-old in Dallas with $40,000 in annual income could buy a qualified health plan under Obamacare with a $5,000 deductible for about $300 a month. A short term medical plan, with the same deductible, would cost about $100 a month, a savings of $2,400 a year. Even after paying a tax penalty of $1000, this consumer is still about $1,400 ahead.

It is worth noting that there are many exemptions to paying the tax penalty. Also, it is not calculated on the first dollar of taxable income and an individual can go without insurance coverage for 90 days without incurring the penalty. Thus, a 2.5% penalty is not really 2.5%.

There is freedom of choice. People covered by STM can usually see any doctor, anywhere. A frequent criticism of Obamacare plans has been that individuals get surprise medical bills for out-of-network providers, or that their favorite doctor is no longer in the network. With short term insurance, there are no pesky provider networks.

In what states can you buy short term medical on a year round basis? Many. And enrolling takes about 5 minutes. Your premium is locked in for the term of coverage. See a list of example state rules here.

If an individual gets really sick, or their income drops, they can buy an Obamacare plan during the next open enrollment period and perhaps qualify for a premium subsidy. Many health policy experts don’t like this loophole in the Affordable Care Act because it may reduce the number of young and healthy people being covered by Obamacare, but others disagree, pointing out that unless there is a sign that says “road closed,” Americans are free to drive down any path they choose.

If you do consider an STM plan here are four things you should know.

  1. Not all STM plans are equal. Some limit coverage to a “schedule” or fixed payment for illnesses or accidents. These are usually very inexpensive. Other plans have limits on coverage for prescriptions.
  2. After the “term” of your coverage ends if you re-apply for coverage there is a new limit on pre-existing medical conditions.
  3. Understand the “extra fees.” Most plans have a small enrollment fee, and might include a monthly membership package that provides access to telemedicine, Rx discounts and other benefits. Make sure you get a good value.
  4. Buy online. You can apply and get accepted for coverage in about five minutes. Most companies offering STM have a customer support team available by phone.

Are STM plans a good fit for all people? No. There are risks and rewards to this type of coverage. The reward often being a net reduction in the cost of health insurance coverage; the risk often being less coverage if you become really sick.

One thing is for sure, as Obamacare plans become more expensive and complicated, not to mention controversial, the market for STM plans will grow.

As Henry Ford once noted, “ Don’t find fault: find a remedy.”

Where can you buy short term insurance online?  Visit eHealth, Agile Health Insurance and Pivot Health.

Editor’s Note: This article was updated May 1, 2017 to reflect new federal limits on short-term medical plans.

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