Limited-Benefit Insurance and Alternative Coverage: Your GoodRx Guide

Overview

Premiums and deductibles on mainstream health insurance plans have risen steeply over the last decade. So it’s no surprise that consumers are exploring alternative coverage plans. 

Alternative plans can be part of a smart health insurance strategy. For example, people with high-deductible health plans may want accident or critical illness policies to soften the blow of big medical bills. And short-term limited-duration insurance can be handy to bridge the insurance gap between jobs.

By themselves, though, these plans provide meager protection. Short-term insurance is often marketed as a cheaper version of Affordable Care Act (ACA) major medical plans. But with the lower premiums come lots of exclusions. Fixed-indemnity benefits don’t come close to matching the cost of hospitalization. 

Some people opt out of health insurance and join medical cost-sharing programs instead. These faith-based organizations provide coverage that resembles insurance, but they are not legally obliged to pay the bills.

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Plan types

• Short-term limited-duration insurance: Lasting from 3 to 12 months, these basic plans can be useful stopgaps but lack ACA benefits like maternity care. People with pre-existing conditions need not apply.  

• Fixed-indemnity insurance: These straightforward policies pay you a preset sum for each covered event or service. Hospital indemnity policies pay inpatients a set amount per day. 

• Accident insurance: This type of fixed-indemnity policy provides extra cash in the event of qualifying injuries. Critical illness insurance does the same for conditions like cancer or stroke.

• Catastrophic insurance: People under 30 or who qualify for hardship exemptions can buy these bare-bones, ACA-compliant policies. 

• Medical cost-sharing plans: Also called “healthcare ministries,” these faith-centered group plans rely on members’ contributions to a common fund. The fund reimburses medical costs, subject to approval. The plans are unregulated because the law does not classify them as insurance.

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Costs

The main attraction of limited benefit plans is their promise of lower costs. And, indeed, premiums for short-term plans tend to be much lower than those for unsubsidized ACA plans. 

Deductibles vary, depending on the type of plan and level of coverage. Catastrophic plans have the highest deductible allowed by the ACA. (In 2022, that’s $8,700 for an individual.) Annualized deductibles for short-term policies can be $10,000 or more. Fixed-indemnity policies rarely have deductibles.

Many short-term policies have out-of-pocket maximums; copays and deductibles may or may not be included. One 2017 study found that some top short-term plans’ annualized maximums exceeded the ACA maximum by a factor of five or more. 

If your limited-benefit plan has no provider network, your care will cost more. This is because insurers negotiate with provider networks to get lower rates for patients. Within medical cost-sharing groups, individual members are encouraged to negotiate prices with their doctors.

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Coverage

A typical short-term policy lasts for 6 months and pays 80% of qualified expenses. Its out-of-pocket maximum ranges between $10,000 and $20,000, with a lifetime benefit cap of up to $2 million. It’s likely to cover medical emergencies and inpatient care. Policy renewal is not guaranteed.

Medical cost-sharing groups generally pay for surgery, lab work, and maternity care. Checkups can be had for a small fee. Pre-existing conditions are allowed, within limits. Most programs have multiple contribution levels; benefits vary accordingly. Lifetime caps may reach $1 million. 

The cash benefit on a fixed-indemnity policy rises with higher premiums but rarely covers the full cost of care. A typical critical illness benefit ranges from $10,000 to $50,000. You’re responsible for the remainder of your bill.

For those who qualify, the ACA’s catastrophic coverage is superior. Free benefits include three primary care visits each year, plus preventive care, maternity care, and prescription drugs.

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Exclusions

Relying on short-term insurance for all your healthcare expenses is very risky. A 2018 study of short-term plans by the Kaiser Family Foundation found that: 

• 43% don’t pay for mental health care

• 62% exclude treatment for substance abuse

• 100% exclude maternity care

Treatments for pre-existing conditions are not covered. In fact, many insurers refuse to even write you a short-term policy if you have pre-existing conditions.

Fixed-indemnity exclusions tend to be self-evident. Accident insurance excludes daredevil injuries (from skydiving, auto racing, etc.) and sports mishaps. Hospital indemnity benefits are withheld if you get hurt due to intoxication or drug use.

Medical cost-sharing plans typically don’t pay for routine preventive care, mental health needs, or treatment for alcohol-, drug-, or tobacco-related illnesses. 

Catastrophic plans exclude none of the ACA’s essential benefits, but the $8,700 deductible means you’ll still pay many bills out of pocket.

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Before you buy

Use caution when signing up for an alternative health plan. Reading all the fine print in the policy documents is a must, to make sure you’re getting the benefits you think you’re paying for. 

As with all financial decisions, collect as much information as you can before signing on the dotted line. Make sure the insurance agent can answer all your questions about waiting periods, policy exclusions, out-of-pocket maximums, prescription drug coverage, and the like.

It’s wise to comparison shop before committing, in order to see typical prices and benefit offerings. Super-low premiums are a sign that the plan’s benefits are skimpy.

Bear in mind that if a plan doesn’t comply with ACA rules, it probably doesn’t provide ACA protections. One important example is coverage of pre-existing conditions by short-term policies. If you fall ill, and the insurer claims your illness began before you enrolled, you are at risk of rescission, which could leave you with no coverage at all. 

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