Want to sell insurance on the Obamacare exchanges? There’s a (3.5%) fee for that.

November 30, 2012

The Obama administration is proposing a new way to finance the health law's insurance exchanges: A fee levied on the insurers who sell in the marketplace. 

Health and Human Services will operate a health insurance exchange in all states that decline to set up the marketplace themselves. In order to finance the exchange's operations, new draft regulations released Friday envision health plans paying a "user fee" if they want to sell in that space.

The size of that fee would depend on the number of members a health plan had enrolled through the marketplace. 

"We propose that a participating issuer offering a plan through a Federally-facilitated Exchange remit a user fee to HHS each month," the draft regulation proposes.

The monthly fee will start at 3.5 percent of the plan member's premium in 2014. It will then move to an amount "specified in the annual HHS notice of benefit and payment parameters for the applicable benefit year."

The idea of charging health plans a user fee isn't unprecedented: The Affordable Care Act specifically contemplated the idea as one way states could pay for the marketplaces, which must become self-financing (read: No more federal dollars) by 2015. 

That means exchanges have to come up with a way to pay for the Affordable Care Act functions they're required to carry out, things like providing consumer assistance services and running a Web site that has continually up to date information about health plan options. 

States setting up their own exchanges have already been contemplating the issue. According to the Commonwealth Fund, Connecticut, Hawaii, Oregon, and West Virginia have all passed legislation that "authorize their exchanges to charge insurers with which they do business."

Now, the federal exchange will do the same. The Obama administration is essentially making a bet: Health plans will decide the benefits of participating on the exchange outweigh the cost of paying a 3.5 percent user fee. Insurers who participate will have access to millions of Americans who can only use their insurance subsidies on this government-administered marketplace. 

One other thing worth pointing out here: This is one of the decisions that states do get to make if they build their own exchanges. They can decide whether to use user fees or grants or some other financing mechanism to make their exchange run. In the federal exchange, states don't have that option: They go with the rules that the federal government sets. That's essentially what they're ceding when when states decide not to move forward on these marketplaces.

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Neil Irwin | November 30, 2012