Short-term care insurance is often a type of critical care insurance that functions much like long-term care insurance. Unlike long-term care insurance, however, short-term care insurance coverage remains in effect only for a relatively short period of time (12 months or less). Taxpayers become eligible for short-term care insurance benefits when they need assistance performing two or more activities of daily living (ADLs). ADLs include the following activities: (1) eating, (2) toileting, (3) transferring in and out of bed, (4) bathing, (5) dressing and (6) continence.¹ Short-term care insurance can also function much like a typical health insurance policy, although coverage will usually be limited to certain specified benefits.

Planning Point: Note that there are many different types of short-term insurance. New rules released under the Trump administration would have allowed short-term health insurance plans that are valid for up to 12 months, rather than the 90-day maximum imposed under the Obama administration. The Trump-era rules also added a provision that allowed these short-term plans to be renewed for up to three years. Short-term limited-duration health insurance (STLDI) plans are generally less expensive, but often provide limited coverage. Further, these plans do not have to satisfy the Affordable Care Act market reform provisions, which means that the plans can set annual and lifetime caps on benefits, exclude certain services (such as maternity care, preventive care and mental health coverage) and reject individuals with preexisting conditions.

A federal district court in Washington, D.C. upheld the rule that expands STLDI insurance so that short-term plans can be sold for up to 12 months, and can also be extended or renewed for up to 36 months. Because of this ruling, short-term health insurance plans can continue to be sold in states that permit such plans. The D.C. Circuit Court of Appeals upheld the lower court ruling.²

One of President Biden’s first acts in office, however, was to issue an executive order that explicitly repealed the Trump-era executive order that sparked the formal agency rule permitting STLDI. On March 28, 2024, the Department of Labor, Treasury department and Department of Health and Human Services issued joint regulations that once again limit the duration of STLDI policies to three months. The maximum duration of the policy can be no more than four months within the 12-month period starting on the date the policy was originally effective (including any renewal or extension period). In terms of extensions and renewals, the four-month rule applies for policies issued by the same issuer to the same policyholder.  The final rules also contain new notice requirements, so that a clear and concise notice must be placed on the front page of each policy.  The notice is designed to prevent confusion among taxpayers who may believe they are purchasing comprehensive health coverage.

Certain types of short-term care insurance, known as recovery insurance, typically provides for a fixed level of daily benefits—around $140 per day is common—for a set period of time. However, the terms of short-term care insurance contracts often provide that if the actual cost of care is less than the stated daily benefit, the remaining funds can be used to pay for care even after the time period for coverage has expired. (For example, if the policy provides a daily benefit of $100 per day for 365 days, but the actual cost of care is $75 per day, the remaining $25 per day can be used to fund care on day 366 and beyond.)

A short-term care insurance policy’s cost will vary based upon the level of benefits and length of the coverage period selected, as well as upon the age and health status of the taxpayer.

1.      IRC § 7702B.

2.      Association for Community Affiliated Plans v. U.S. Treasury, No. 18-2133 (July 18, 2019).

Taxpayers who apply for short-term care insurance (STC) are generally not required to complete the comprehensive applications and medical history screening that is required to qualify for long-term care (LTC) insurance. In general, STC provides an attractive option for those who cannot afford, or are unable to qualify for, traditional long-term care insurance (LTCI). Current statistics show that over 40 percent of LTC claims last less than one-year: the most common reason for these claims are short, recoverable illnesses, sudden terminal illnesses, and the single use of non-caregiving benefits (such as equipment and training). For this reason, some clients may find STC a more suitable option.

STC can also be employed as a “gap” to fill the elimination period of someone’s existing LTC policy. They may have elected a longer elimination period at a time when circumstances were different, or when they didn’t have another choice.

To summarize, STC solves some of the ingrained challenges inherent in traditional long-term care (i.e., more rigorous underwriting and perceived high cost), and is ideal:

1. for those who have waited too long to apply for coverage;
2. when cost is a barrier;
3. when age or health are barriers;
4. for rehab or accident claims;
5. for filling existing elimination periods;
6. for protecting against Medicare’s “observation status” penalty;¹
7. when existing LTCI has not kept pace with inflation; and
8. for those who object to tax-qualified (TQ) triggers and/or the 90-day certification.

Planning Points: Although STC insurance has been offered since the mid-90’s, it remains some of the most rate-stable coverage available in the LTC market. Part of the reason it is not more widely promoted is that it has historically—although not exclusively—been offered by carriers with a “less-than-A” rating. If the day comes that “first tier” name brand insurers begin marketing STC, it has many things going for it to penetrate the middle market.

1.      Although new legislation looks to be closing this loophole, for years many patients discharged from the hospital to a nursing facility believed they had satisfied Medicare’s onerous “three-day prior hospitalization” gatekeeper, only to find they had never been admitted as an inpatient to the hospital, and were instead kept under “observation status.”

Editor’s Note: The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed.

No. According to the IRS, individual health insurance coverage does not include short-term, limited duration insurance.¹ Because short-term care insurance is, by its nature, short-term and limited in duration, such coverage will not satisfy insurance obligations under the Affordable Care Act (ACA).

Planning Point: It’s worth noting the current controversy surrounding short term medical health plans. Because individual health insurance “does not include short-term limited duration insurance,” this particular product has been exempted from many ACA market reforms.²

In June 2016, the Obama administration released a package of proposals designed to strengthen the public risk pool (i.e., those who have coverage through the federally facilitated marketplace, or “exchange”). Their concern was that the risk pool was being damaged by individuals who could enroll during special enrollment periods (triggered by life events) but chose not to.

This ties back to short term medical care (STMC), which had been sold precisely for such temporary stop-gap situations. The problem was that:

• STMC is not subject to many of the ACA’s rules;
• STMC can be medically-underwritten and priced on health;
• STMC can discriminate against those with pre-existing conditions; and
• STMC does not have to cover essential health benefits.

The problem (as it has been identified) is that insurers began selling STMC for periods as long as 12 months to serve as primary coverage, cherry-picking the healthiest people and plucking them out of the risk pool, all the while avoiding consumer protections.

The Obama-era rules changed STMC in the following ways:

• STMC would be capped at a maximum of three months;
• STMC policies could not be renewed; and
• Insurers had to disclose to consumers that the STMC does not constitute minimum essential coverage, so that the individual could still owe a penalty (for non-compliance with the ACA mandate) in years prior to its repeal.

Planning Point: The Trump administration made changes to expand the availability of short-term limited-duration health insurance. The Biden administration used executive power to once again limit the availability of short-term health plans. Taxpayers should pay close attention to these political developments when opting to purchase short-term health insurance.

Some insurance industry trade groups have opposed these changes, citing the failure of similar attempts to regulate the market.

1.      Treas. Reg. § 1.5000A-2(d); 42 USC § 300gg-91(b)(5).

2.      300gg-91(b)(5).

No.

The Affordable Care Act (ACA) enacted hundreds of market reforms, including many which affect the individual and group health insurance markets. Title 42, Section 300gg-91 defines these terms (such as “individual health insurance coverage”), but it also itemizes a number of “benefits” which are exempt from the subchapter’s requirements.

Among these are “benefits for long-term care, nursing home care, home health care, community-based care, or any combination thereof” (if such benefits are offered separately).¹ Thus, a broad category of coverage is excluded based on its function rather than its identification.

Furthermore, in the explicit definition of “individual health insurance”, there is a carve-out: it “does not include short-term limited duration insurance”² although this is more likely a nod to short-term medical (see Q 483).

1.      Other excepted benefits include “hospital indemnity or other fixed indemnity insurance” (if offered as independent, non-coordinated benefits), and coverage for a specified disease or illness.

2.      300gg-91(b)(5).