Funding The Affordable Care Act’s Reinsurance Program
Earlier this month, HHS issued the final rule for the reinsurance program under the Affordable Care Act (ACA). I believe it will be highly controversial once it becomes understood. I’ll start with a backgrounder and then move to a short discussion of how this is a tax on states, how it may adversely impact employees of state governments, and how the government is proposing to selectively administer these taxes depending on the religious beliefs of those involved. This post is necessary background to fully understand the Administration’s proposed “compromise” on contraceptive coverage, which I am covering in a series of posts beginning here.
The drafters of the ACA were rightly concerned that a flood of very sick individuals might flood the Exchanges in 2014, destabilizing the Exchanges before they got off the ground. To help offset the cost of those individuals, they established a reinsurance program in S. 1341 of PPACA. This program lasts for three years, from 2014-2016. It will be funded by $20 billion of effective taxes levied on all fully-insured and self-insured plans and individuals in this country.
On top of the $20 billion in taxes, the authors proposed that an additional $5 billion in “contributions” be collected and deposited in the general Treasury. Although not official, it is my understanding that this amount was set in order to offset the shorter-term ERRP program, which is already closed down to new entrants because it has run out of money (this is the $5 billion that was set aside to fund large claims in employee retirement plans beginning in 2010).
Technically, each State is supposed to run their own reinsurance program. They are to collect their share of the $25 billion, pony up $5 billion of that to the general Treasury, and use the remaining $20 billion to pay for high cost enrollees in individual Exchanges.
How big is this contribution likely to be? In 2014, $12 billion must be collected ($10 billion to fund the reinsurance program, $2 billion to fund the Treasury). If we assume that there will be 250 million people covered by some form of private health insurance or another, then this fee would amount to $4 per person per month, or $48 per person per year, or $192 a year for a family of four. If a state or HHS charges administrative expenses on top of this amount, the fees could be higher. Because the program does get phased out over time, however, the 2014 fee level is the highest and it gets phased to zero by 2017.
Complications and Possible Controversies
1) HHS is proposing to levy an administrative tax on states and their citizens, above and beyond the reinsurance payments as part of the reinsurance program itself. In the latest rule, HHS acknowledges that most states do not have the authority to regulate so-called “ERISA” plans that are self-insured. This means States aren’t legally authorized to collect the funds from self-insured plans that the ACA otherwise requires them to do. To solve this minor dilemma, HHS is exercising its obligation under part of the ACA (buried in S. 1321 (c) if you are interested) to step in whenever state, in turn, fail to meet their obligations under the ACA. In my opinion, this is where the problems begin.
First, HHS rightfully is commenting that they can’t wade in here for free. HHS will incur administrative expenses. HHS in this final rule is therefore declaring that the administrative burden of HHS’ actions above must be reimbursed by the States (see 153.220(c)). This effectively leaves the states with only two choices. First, they can pay the administrative assessment of our general revenues, or they can, in turn, go through the process of increasing their state’s contribution rate in order to cover all the administrative charges of the program. The first is a direct tax on the state, the second is an indirect tax on its citizens.
2) HHS is proposing to levy assessments directly on state and local governments, to the extent that they offer an employee benefit plan. Insurers and third-party administrators (TPAs) are required to pay assessments on behalf of *all* of the people they serve. If a TPA serves the state government, then the TPA will owe contributions on behalf of all employees (and dependents) of the state (or at least on behalf of those who sign up for the state’s plan). TPA’s don’t have sufficient cash-flow to cover the size of these contributions, and this “contribution” amount will have to be paid for by the plan sponsor, i.e., state in this case.
As I understand it, this is a significant gray area in the law, and ripe for litigation. In general, the federal government can’t levy taxes directly on state governments. For a related example, whether a state government will have to pay the “employer mandate” penalties under the ACA is similarly in question. The federal government also doesn’t claim jurisdiction over state plans via ERISA, which carves them out, explicitly. It is entirely unclear to me, therefore, under what legal authority HHS will collect payments on behalf of state employees. HHS does not address this issue in their final rule, instead, they are simply asserting their authority in this regard.
3) HHS is proposing to selectively waive these fees. In a separate advanced notice of proposed rule making on contraceptives, the federal government is proposing to selectively waive or reduce these fees in instances where the contribution obligation is related to a religious organization who uses a third-party-administrator. The idea is that such an administrator may need the cash flow to help pay for contraceptives that the government will require the administrator to pay for. More on this in another post.
The question here, however, is whether the government, even if it has the authority under (1) and (2), can selectively waive these taxes based upon the structure of the underlying coverage, which may be uniquely adjusted because of religious-belief conflicts. Also, this final rule is very clear that the $25 billion in total fees *must* be collected. If some plans get their fees waived, it is unclear as to how that revenue shortfall will be made up, or if it will be made up. Again, more on all of this in a follow-up.
If any expert lawyers have good answers to these issues, I’d appreciate a heads up in the comments section. (I will do better tracking this blog from now on)