Junk Insurance 

The Biden administration has recently come out on the offensive against short-term “junk insurance” plans that they claim play consumers as “suckers,” asserting their the effort will lower health care costs for Americans. But The Wall Street Journal described it as “forcing Americans to buy expensive products they don’t want or need.” 

Biden’s proposal traces back to very restrictive regulations on such plans under the Obama administration, which limited them to three months. The Trump administration eased those limits to allow someone to be on such a plan for up to three years, leading to substantial growth in that corner of the insurance industry. Biden now wants to undo the Trump reforms.

So what is it about short-term plans that now puts them under the gun? They are not just short-term, but also do not need to provide comprehensive benefits (which those plans already must clearly disclose). Unlike Obamacare plans, they can exclude areas such as pediatric and/or maternity care services, mental health treatment, alcohol and drug treatments, and prescription drugs. They can exclude pre-existing conditions. They are not restricted in their ability to base premiums on age and risk. And given Obamacare’s forced redistribution from the young and healthy to the older and less healthy, it offers those “suckers” a valuable escape from that extortion. But that means it is anathema to Obamacare supporters who need “donors” for their giveaways to others.   

What I find most interesting about this latest iteration in the crusade against short-term health plans, and for Obamacare’s supposedly superior offerings, is how much better those short-term plans often fit the principles of insurance than Obamacare plans.

The rationale for insurance is reducing risk from uncertain events. By pooling a large number of those with similar risks, insurance companies can make those risks more predictable, which is what makes insurance possible and valuable for risk-averse people. 

One of the implications is that insuring against things that are certain to occur, say, annual checkups, offers no risk reduction — no benefits to weigh against the added costs of insurance administration — yet such coverage is frequently included (as with Obamacare coverage). Similarly, small healthcare risks are cheaper to cover with modest levels of savings than by bearing the administrative costs of utilizing insurance. Such coverage is not justified by the principles of insurance, but the magnitude of the subsidies involved.   

Since the rationale of insurance is reducing risk, insuring people against risks they are not, or are only minimally, exposed to offers little or no benefit in exchange for higher costs. Those who are young and healthy get far less benefit than others. Further, teetotalers would not voluntarily insure for alcoholism treatment. Those certain they would never use drugs might not want to pay for addiction treatment. Where pregnancy is not possible, maternity coverage provides little value. To childless people, pediatric care is similarly of little value. So you can see why escaping those costs (which provide people so little benefit) can be so attractive to those adversely affected.

Mandating coverage of pre-existing conditions, always emphasized by fans of government health plans, is also revealing. Such a mandate doesn’t reduce everyone’s risk exposure. It just forces others to cover the costs of some people’s health care, after it is already known they will have far higher costs. That does make it a good way to try to buy the votes of those who will pay less as a result, however. It is analogous to making casinos let some people bet once the roulette ball or dice have stopped moving, or after the cards have all been turned over, or letting you take out fire insurance after your house has burned down. But it also has the added political advantage of allowing blame from those overcharged to be deflected at insurance companies rather than the government mandate.

Catastrophic coverage is also instructive. It is the type of coverage most consistent with insurance principles. It allows the most valuable risk reduction — from very costly, highly uncertain events. It also reduces the overconsumption of medical care due to the lower cost patients must pay once they are insured, because it doesn’t apply to all medical care. It is available via short-term insurance plans, and such plans often have far broader provider networks than the narrow provider lists under Obamacare. But Obamacare was heavily slanted against such coverage. It was restricted to people under 30 (further limited by extending guaranteed subsidized family coverage to 26-year-olds), unless one could get a special exemption. Further, the subsidies available to those in the “metallic” Obamacare plans were not available to catastrophic plans. As a consequence, less than one percent in Obamacare selected the most valuable sort of insurance to have.

All those shortfalls from the principles of insurance that the Biden administration is trying to move us back toward (but hiding the actual results until after the 2024 election, when it would be implemented) reveal their claims to reform the healthcare system (unless reform just means change, rather than improve) are bogus. But we should also remember that Obamacare offerings are often inferior to those available in the short-term market, even with huge taxpayer subsidies and transfers from the real suckers who are forced to overpay for their care.  

Biden’s defenders sometimes argue that some can have too little catastrophic coverage (which only would happen when the consumer thought that such protections were not worth the money) under short-term plans, but Obamacare deductibles ($4,753 in the typical Obamacare “silver” plan) are often so great to make such coverage unaffordable to many. And better terms have long been available in the short-term market. A Manhattan Institute study in 2019, for instance, reported that a 60-year-old smoker in Atlanta could find a short term plan with similar benefits for hundreds dollars less in premiums and deductibles. And Michael Cannon of the Cato Institute, who has called Obamacare the real “junk” insurance, has reported on a woman who was able cover an emergency diverticulitis surgery with a $274 per month, $2500 deductible short-term plan, when the equivalent exchange plan would have cost her over $800 a month, with a deductible of over $6000.

Beyond noting that Obamacare plans are often worse for many people and many situations than the short-term plans they call junk, it is highly questionable whether tightening restrictions on short-term plans would improve exchange plans. For instance, the Wall Street Journal cited a 2021 Galen Institute study of state experiments restricting short-term plans, and found they didn’t reduce full-coverage premiums.

In sum, Obamacare plans are often “junkier” than available short-term plans for a large number of Americans in a large number of circumstances. They widely violate the principles of insurance, hidden behind massive redistribution that seems to be their real primary goal. And the arguments for Biden’s rollback of short-term plans as “reforms” are junk as well, because they take away individual choices and give American worse results in exchange. They are not a push for Americans, but a push against Americans.

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