Short-Term, Limited Duration Insurance: How Long is Too Long? - McDermott Will & Emery

Short-Term, Limited Duration Insurance: How Long is Too Long?


On July 7, 2023, the US Departments of Health and Human Services, Labor, and Treasury (collectively, the departments) released a Notice of Proposed Rulemaking (NPRM) and Fact Sheet that proposes to revise the definition of short-term, limited-duration insurance (STLDI) to limit the duration of such coverage to three months or less.

The NPRM also includes proposals to modify the conditions under which hospital indemnity and other fixed-indemnity insurance may be considered an excepted benefit and to clarify the tax treatment of benefit payments received under employer-provided accident and health plans, among other things.

In Depth

Evolving Definition of STLDI

STLDI is a type of health insurance that can, among other things, fill the temporary gaps in coverage that might occur when a consumer transitions from one plan to the next. Under the Public Health Service Act, STLDI is exempt from the definition of individual health insurance coverage, which means STLDI generally does not need to comply with federal individual market consumer protections. These protections include the Affordable Care Act’s prohibition on preexisting condition exclusions, the prohibition on discrimination based on health status, and the prohibition on lifetime and annual dollar limits for essential health benefits, among other standards. This means that STLDI also does not qualify as “minimum essential coverage” (MEC); however, following the repeal of the federal penalty for not maintaining MEC, this distinction from other types of health insurance is less significant for individual taxpayers.

Initially, STLDI was defined as health insurance coverage that lasts up to 12 months after the original effective date of the contract. In 2016, the Obama administration amended the definition of STLDI to limit the maximum length of coverage to no more than three months. In 2018, the Trump administration reversed course on this policy, updating the definition to provide that STLDI includes coverage with an initial term of up to 12 months, which may be renewed or extended for up to 36 months in total. This significantly expanded the ability of health insurers to offer STLDI products.

Proposal to Limit STLDI to No More Than Three Months of Coverage

The Biden administration is now proposing to once again amend the definition of STLDI to revert to the limitations applicable under the Obama administration. Specifically, the proposed definition would limit the length of the initial contract term to no more than three months, with a maximum coverage period of no more than four months, taking into account any renewals and extensions. The definition would also provide that a renewal or extension includes the term of a new STLDI policy that is issued by the same issuer to the same consumer within a 12-month period.

The NPRM also proposes revisions to the content and formatting of the notice that informs consumers purchasing STLDI about the differences between STLDI and comprehensive coverage.

In the NPRM, the departments state that this proposal balances the need to ensure consumers have access to affordable health insurance options, while distinguishing STLDI from comprehensive coverage. The departments also state that the amendment is necessary to protect the risk pools and stabilize premiums in the individual market.

Effective Date: A Bifurcated Approach

If finalized, the new definition of STLDI would apply to policies sold on or after the effective date of the final rules. STLDI sold or issued before the effective date of the final rules could still have an initial contract term of up to 12 months, with a maximum duration of up to 36 months, to the extent permitted under state law. However, policies already in existence would still be required to comply with the revised notice standards.

Request for Comments

The departments are requesting comment on the proposed definition and, specifically, whether the initial duration of coverage should be longer than three months. The departments are also requesting feedback on:

  • Whether there are circumstances under which STLDI should be renewed or extended for periods of time beyond what would be permitted by the NPRM.
  • Whether there are additional ways to differentiate STLDI from comprehensive coverage options (e.g., limits on the sale of STLDI by a different issuer).
  • Ways to prevent or mitigate the potential for direct competition between STLDI and comprehensive coverage during the open enrollment period for individual market coverage, among other requests.

Comments are due September 11, 2023. Please contact:

  • Kate McDonald
  • Emily Curran
  • Rachel Stauffer
  • Leigh Feldman