What argument could there possibly be against handing Rhode Island’s health benefits exchange under the Affordable Care Act (ACA; ObamaCare) over to the federal government that mandated it when the money stops flowing?

According to Sean Parnell, a health insurance expert and adjunct scholar with the RI Center for Freedom & Prosperity, a fee cited by HealthSource RI officials as a central part of their answer to that question was badly mischaracterized. “The major claims made Thursday by HealthSource RI Director Christine Ferguson in defending continued state-operation of its health care exchange, are not supported by our analysis of the ACA law,” said Parnell

Seeking to defend her government-run start-up company against a movement seeking to take it off the state’s budget, Ferguson took to press conferences and talk radio, yesterday.  Her reasons included assertions that local control is better and appeals to Rhode Islanders’ painful knowledge that the state is short on jobs.  (The state government paid Ferguson $181,917 for her work in fiscal 2013.) She also mentioned a previously little-discussed fee structure for the federal exchange.  According to Erika Niedowski, of the Associated Press:

She said she did not know if Rhode Island would be assessed a penalty for pulling the plug on the exchange. But the federal government would get an estimated 1.9 percent fee on premiums from individuals and small employers whose insurers offer coverage on healthcare.gov, she said. The fee would be assessed on all those using that carrier, even if they bought a policy outside of the federal marketplace.

Ferguson estimated the fees would amount to about $17.3 million overall.

Writing in the Providence Journal, Randal Edgar offered additional details:

She also said that starting in 2016, joining the federal exchange would add a 1.9 percent fee to the premiums of people who have individually purchased plans and people who work for companies with less than 100 employees, regardless of whether the plans are purchased through the exchange.

Inasmuch as no experts with whom the Ocean State Current spoke had heard of such a fee, there was a chance that Ferguson was actually breaking big national news that would reshape America’s understanding of federal health benefits exchanges.  Officials with the Centers for Medicare and Medicaid Services (CMS), when asked for further clarification, said they were unsure about the details being discussed in Rhode Island.

Asked for details and documentation, however, HealthSource spokeswoman Dara Chadwick provided an “HHS Notice of Benefit and Payment Parameters for 2014,” pointing to a section explaining “Federally-Facilitated Exchange User Fees”:

For the 2014 benefit year, we establish a monthly user fee rate equal to 3.5 percent of the monthly premium charged by the issuer for policies that it offers through the [Federally-facilitated Exchange (FFE).  An issuer will be required to pool the cost of the FFE user fee across all non-grandfathered plans that it offers in a market in a State.

As Chadwick clarified in an email, “for carriers participating in the FFE, the fee is applied to the same plans inside and outside of the exchange. If the carrier offers a different plan off exchange only, the fee would not apply.”

A closer look at the relevant regulations reveals the mechanism.  Section 156.5(c) calls for insurers to assess the federal government’s fee (currently 3.5%) on all plans “where enrollment is through a Federally-facilitated Exchange” — that is, the total amount of fees are determined only by the plans purchased through the exchange.  However, according to section 156.8(d)(1), the price of any plan offered on the exchange must be determined as a pool for all people who purchase the plan, wherever they purchase it, and divided evenly among them all, including the exchange fees.  In other words, the total amount of fees assessed on users of the exchange is spread among everybody with the same plan, on and off the exchange.

That might work out to a 1.9% fee for everybody, or it might not.  According to rough estimates by Sean Parnell, “if they’re going to get $17.3 million in fees, they’re going to have to see $494 million in total exchange-based premiums. And there’s just no feasible way to do that without a massive increase in enrollment, probably at least quadrupling the current number of policyholders.”  Parnell estimates that enrollment would have to be in the neighborhood of 100,000; it is currently less than 28,000.

Parnell’s calculation uses the federal government’s current 3.5% rate, as it is being applied to federally run exchanges right now.  If that rate were applied to the approximately 28,000 people who’ve selected plans on HealthSource RI this year, the cost of a federal exchange to Rhode Islanders would be more like $5 million, versus the $23 million for in the budget.

Moreover, the same federal regulations also require any fees applied to plans in a state-based exchange, like HealthSource RI, to also be spread out to everybody who purchases the same plan off the exchange.  It is therefore possible that Rhode Island could impose a much higher fee on plans purchased through the exchange and rely on the entire insurance marketplace to cover the cost.

That possibility raises a key point that must be considered in Ferguson’s argument: Even if HealthSource RI can reduce its costs by 25% or more, to match the projected federal cost of $17.3 million, Rhode Islanders still have to pay for it one way or another.  What this new information suggests is that there is no legal way for the state to fund its exchange without imposing fees on Rhode Islanders who don’t use it, whether it’s done through fees on plans, surcharges to insurers, or just a general tax on the entire state.

One thing the new information does not change, however, is that it doesn’t appear to make sense for a state the size of Rhode Island to impose another layer of costs on its tiny health insurance market.

 

Featured image: Taken in 2012, on the day the Supreme Court declined to invalidate the Affordable Care Act. From left to right: Steven Costantino, Secretary of the RI Executive Office of Health and Human Services; Elizabeth Roberts, Lieutenant Governor; and Christine Ferguson, Executive Director of HealthSource RI.