Despite the Affordable Care Act's individual mandate, say the departments, individuals are cutting their premium costs by purchasing short-term policies and simply paying the IRS penalty come tax time.

Short-term policies are exempt from the ACA's ban on pre-existing condition exclusions and prohibitions on lifetime and annual limits for essential coverage, which means they are cheaper than even the most threadbare exchange-based offerings.

“In some instances, individuals are purchasing this coverage as their primary form of health coverage and, contrary to the intent of the 12-month coverage limitation in the current definition of short-term, limited-duration insurance, some issuers are providing renewals of the coverage that extend the duration beyond 12 months,” the departments said in the final rule.

The rule's release comes at a time of intensified scrutiny for the ACA. Exchange-wide premium hikes, coupled with an exodus of major carriers from the exchanges and the near total failure of nonprofit co-op health insurers, have heightened speculation that President Obama's signature policy achievement has descended into a death spiral.

Supporters of the ACA say that death spiral – in which escalating premiums chase healthier lives from exchanges, leaving a disproportionate share of sick health care consumers who further drive up premiums — is far from actually occurring.

Nonetheless, the new rule is clearly designed, in part, to re-capture healthier lives that have gravitated to short-term plans.

By universally limiting short-term policy duration to three months, the departments are gambling that the individual market's risk pool will improve as healthier individuals who might otherwise purchase short-term plans instead gravitate toward exchanges.

“Healthier individuals may be targeted for this type of coverage, thus adversely impacting the risk pool for Affordable Care Act-compliant coverage,” according to the rule.

Trend makes regulators 'nervous'

In the rule, the agencies acknowledge that short-term policies represent a small fraction of the health insurance market. But since the ACA's individual mandate requirement went into effect, the market for short-term policies has nearly doubled, according to estimates in the final rule: In 2013, $98 million in total premiums covered about 80,400 lives; in 2015, $160 million in short-term premiums covered about 148,000 lives.

That growth clearly caught the attention of regulators.

“I think they were seeing a trend that made them nervous,” said Timothy Jost, an attorney and health law expert.

Jost sees some utility in short-term policies, but generally agrees with the regulators' assessment that the short-term policy market is showing symptoms of abuse.

Last April, the Wall Street Journal reported that several short-term policy brokers were seeing a surge in demand for these policies. A survey by online broker eHealth Inc., which fielded 147,000 applications for these policies in 2015, said half of all consumers cited price as their reason for purchasing the policies, while only 39 percent said they bought the policies because they needed temporary coverage.

The Journal also reported that Health Insurance Innovations, an online marketer of voluntary and ancillary products, was looking to expand its short-term policy business by making it easier for consumers to automatically renew their contracts so they could keep the policies for up to three years.

Jost, who also serves as a consumer liaison to the National Association of Insurance Commissioners, said carriers like Blue Cross that continue to participate in the exchanges are supportive of the new limits on short-term policies, given their exposure to exchange-based risk pools.

In its comment letter during the rulemaking process, NAIC was one stakeholder that argued the three-month limitation was too short and could end up hurting consumers who need more time to transition between employers and plans, such as those with longer probationary periods or a longer gap between employment.

But the departments reasoned that only a “small fraction” of consumers have purchased policies with limits of more than three months. Once the new rule takes effect, those using short-term policies to transition to a new plan can instead enroll in the exchanges, where regulators reason they will benefit from enhanced consumer protections under ACA-qualified plans and avoid the tax penalty of having no qualified coverage.

Rule's limited impact on risk pools

Joel White, president of the Council for Affordable Health Coverage, a consortium of carriers and providers that advocates for lowering health care costs via greater market competition, doubts the new rule will benefit exchanges' risk pools, despite regulators' claims.

“The agencies didn't provide empirical data to show any effect on the risk pool or any estimates of how the policy would affect plan choice and costs for consumers,” said White in an email.

The final rule only cites the Journal report showing a surge in short-term policy demand – a trend that White said is due in large part to the fact that many consumers, particularly those ineligible for subsidies, find the exchange's options to be unaffordable.

“We believe the regulation will not significantly and positively impact the risk pool of the insurance exchanges,” said White.

Agencies punt on limiting fixed indemnity terms

In the proposed version of the rule, the agencies sought to fundamentally change how hospital indemnity and other disease-specific exempted voluntary polices are written.

The proposal required that those plans pay benefits on a per-day or per-period basis, rather than on a per-service basis, as many voluntary indemnity policies are now written.

That would mean policies would pay a flat dollar amount regardless of the type of care or services received, explained White.

But the final rule did not include the proposed revisions to indemnity policies. The departments did not explain why, but only said, “The Departments may address this issue in future regulations or guidance.”

One explanation for the agencies' reluctance comes from a ruling issued in July by the U.S. Court of Appeals for the District of Columbia Circuit.

In Central United Life Insurance Co. v. Burwell, the D.C. appellate court unanimously upheld a lower court's decision that the HHS was guilty of statutory overreach in mandating that voluntary indemnity plans may only be sold to individuals with minimum essential coverage.

White suggested the Burwell ruling may have influenced the departments to withdraw their proposals limiting the ways in which indemnity policies pay benefits.

“We hope the administration realized, in withdrawing this provision, that they lacked this authority – especially following the D.C. Circuit Court of Appeals ruling,” said White. “We also hope that they realized their proposed regulation would have eliminated nearly all fixed indemnity policies on the market today, cancelling coverage for nearly 49 million enrollees.”