(Bloomberg) — Hundreds of thousands of people whose health plans are being canceled because their coverage doesn’t meet Obamacare rules will be exempt next year from the U.S. mandate that all Americans carry medical insurance.

People losing coverage will now be allowed to buy bare-bones “catastrophic” insurance that the law usually limits to those younger than age 30, the Centers for Medicare and Medicaid Services said Thursday. Others can opt out completely without the threat of the fines being imposed next year on the uninsured as part of the Affordable Care Act.

The change will affect fewer than 500,000 people as a Dec. 23 deadline looms to purchase policies for coverage that starts Jan. 1, according to Obama administration figures. Insurers said the exemptions may keep younger, healthier people from buying new coverage through Obamacare, a demographic that is needed to bring balance to the new government-run insurance marketplaces.

“This latest rule change could cause significant instability in the marketplace and lead to further confusion and disruption for consumers,” Karen Ignagni, the president of America’s Health Insurance Plans, the industry’s Washington-based lobbying group, said in an e-mail from a spokesman.

President Barack Obama has been issuing a flurry of last-minute policy changes to give people more time to sign up for his signature domestic policy initiative following a botched rollout of key programs, delays of others and political backlash over the cost and effects of the law.

Republican response

The latest exemption from the law’s individual mandate would last a year and potentially longer for consumers granted hardship exceptions, according to the guidance issued by CMS’s Center for Consumer Information and Insurance Oversight.

“The sad reality is that when the law takes effect come Jan. 1, more Americans will be without coverage under Obamacare than one year ago,” Representative Fred Upton, a Michigan Republican who is chairman of the House Energy and Commerce Committee, said in an e-mail. “Rather than more White House delays, waivers, and exemptions, the administration should provide all Americans relief from its failed law.”

The Obama administration on Thursday disputed such claims saying it’s impossible for more people to lose coverage than gain coverage because of policy cancellations. Fewer than 500,000 people will lose plans starting Jan. 1 because their policies don’t meet the law’s requirements and they haven’t found new coverage, according to administration officials who briefed reporters yesterday on condition of anonymity.

California cancellations

California, though, has already reported that more than 1 million policy holders have received letters from their current insurers saying their coverage will be canceled after Dec. 31 because their plans don’t comply with Obamacare.

House Majority Leader Eric Cantor, a Virginia Republican, reiterated his call for a delay in implementing the ACA. He said in a statement that the latest exemption shows the law isn’t working and changes to the U.S. health-care system shouldn’t be based on the president’s “random impulses.”

The Obama administration said it’s just trying to give people as many options as needed,

“This is a common-sense clarification of the law,” Joanne Peters, a spokeswoman for U.S. Health Secretary Kathleen Sebelius, said in an e-mail. “For the limited number of consumers whose plans have been canceled and are seeking coverage, this is one more option.”

Policy changes

People whose plans are canceled must apply to the government for a hardship exemption from the requirement to carry insurance and submit the letter they received from their current insurer. Once the government approves the exemption, they are eligible to purchase catastrophic plans, which usually have the lowest premium of any coverage sold on exchanges. The plans aren’t eligible for federal subsidies, meaning there’s no discount for the premium.

Obama said Nov. 14 that states could allow plans to extend current policies for a year. At least 22 states, including California and New York, have said they won’t allow insurers to extend expiring plans, according to Ignagni’s group. Instead, people in those states will have to buy new policies that comply with the law, either directly from insurers or through government-run marketplaces.

A week later, he pushed back the deadline to sign up for coverage effective Jan. 1 by eight days, to Dec. 23.

Industry concession

On Dec. 13 the administration urged insurers to provide more leniency to people shopping for new coverage by allowing them to pay for plans later in January and sign up retroactively for coverage beginning Jan. 1. The government also asked insurers to cover care from any doctor or hospital in January and to cover refills of prescriptions during the month regardless of any network restrictions.

The industry said this week that it would allow payment for coverage beginning Jan. 1 as late as Jan. 10. While insurers haven’t agreed to the other requests, they are automatically enrolling in new plans many policy-holders who would otherwise lose coverage.

The government is trying to reach people seeking new policies who may have experienced bugs or errors in the federal enrollment system. More than 2 million e-mails have been sent to people who tried to sign up in October and November and hit technical problems, according to the Obama administration officials who briefed reporters. Government call centers have placed more than 600,000 phone calls to those customers as well.

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