Challenge to Short-Term, Limited-Duration Health Insurance Regulations Rejected on Appeal

A federal appellate court has rejected a challenge to regulations extending the permitted length of short-term, limited-duration health insurance (STLDI) beyond the three-month cap established in 2016 regulations. In August 2018, the IRS, DOL, and HHS finalized regulations redefining “short-term” and “limited duration” to cap the maximum initial coverage period at less than 12 months and the maximum total duration (including renewals and extensions) at 36 months (see our Checkpoint article). A federal trial court rejected a challenge to the regulations by a collection of associations, organizations, and insurers that offer individual policies through the Exchanges, holding that the regulations were not arbitrary and capricious in violation of the Administrative Procedures Act and that the revised definition of STLDI was not contrary to HIPAA and the Affordable Care Act (ACA) (see our Checkpoint article).

In upholding the trial court’s decision, the appellate court explained that Congress excluded STLDI from HIPAA’s definition of individual health insurance in 1996 and delegated authority to the agencies to define STLDI. The agencies’ initial definition, which established a maximum term of 12 months with unlimited renewals, remained in place from 1997 to 2016. In enacting the ACA, Congress incorporated HIPAA’s definition of individual health insurance coverage, thereby ex-empting STLDI from many ACA reforms. In 2016, out of concern that STLDI was drawing healthy individuals out of the risk pool for ACA-compliant insurance, the agencies reduced the maximum term of STLDI to less than three months and effectively prohibited renewals (see our Checkpoint article). The appellate court ruled that the 2018 regulations’ revision to this 2016 STLDI definition was not unreasonable, concluding that the challengers sought to impose an artificial limitation on the agencies’ discretion. According to the court, the agencies did not create a new category of insurance but simply crafted rules to clarify the exception Congress created, giving meaning both to “short-term” (the initial policy term) and “limited duration” (the total policy length, including renewals). It also ruled that the agencies’ definition is reasonable, noting its similarity to the pre-2016 definition. The court rejected the challengers’ arguments that the agencies failed to consider the regulations’ broader effects on the ACA and acted outside of their discretion to balance competing policy goals.

EBIA Comment: STLDI avoids most ACA mandates, but the agencies are authorized to establish standards applicable to its sale, including setting the maximum term and requiring notices to consumers. Although this is primarily an individual market issue, it has implications for employers because, for instance, the availability of low-cost STLDI may affect whether employees elect COBRA coverage, and loss of eligibility for STLDI may trigger HIPAA special enrollment rights. For more information, see EBIA’s Health Care Reform manual at Section V.C (“What Is a Group Health Plan?”) and EBIA’s HIPAA Portability, Privacy & Security manual at Section VI.F (“Excepted Benefits: Certain Health FSAs, Dental, Vision, and Others”).

Contributing Editors: EBIA Staff.