Senate Bill 2 and Connect for Health Colorado’s Administrative Fee

Last month, Colorado Senator Kevin Lundberg (R, Berthoud) introduced Senate Bill 2. In a nutshell, the bill calls out Connect for Health Colorado’s administrative fee as a violation of TABOR, since the fee is technically paid by people who aren’t enrolled through the exchange, could be considered a tax, and wasn’t voted upon by Colorado residents.

Connect for Health Colorado is funded by two different assessments. The first is a general assessment ($1.80 per member per month) and it applies to all private health insurance policies in Colorado, regardless of whether they’re sold through the exchange. The general assessment has been in place for years, because it used to fund CoverColorado. And it used to be considerably higher than it is today.

The second is the administrative fee, and this is the one that triggered SB2. The administrative fee (3.5% of premiums) is assessed only on health plans sold through Connect for Health Colorado. But for the health insurance carriers that offer plans through the exchange, the total cost of the fee is spread across those carriers’ combined on and off-exchange book of business.

Here’s an example, with simplified math: Let’s assume Carrier X sells 100 policies through the exchange, and 100 policies outside the exchange. Let’s also assume that each plan costs $100/month.

The administrative fee for the plans sold through Connect for Health Colorado would be $350/month (3.5% of $100, which is $3.50, assessed on the 100 plans sold in the exchange, for a total of $350). Simple enough so far.

Senate Bill 2 and shared risk poolsBut the ACA requires that carriers utilize a single risk pool for all individual business sold in a state, and another single risk pool for all small group business (states can opt to further combine individual and small group risk pools so that each carrier has just one pool for the whole individual/small group market, but only Vermont and Massachusetts have done so thus far – in Colorado, carriers maintain one risk pool for individual plans, and another for small group plans). In 45 CFR 156.80, HHS clarified that exchange user fees are among the expenses that must be spread across a carrier’s entire risk pool (ie, the whole individual book of business, or the whole small group book of business). This was done so that there would be a level playing field for on and off-exchange plans, and it ensures that premiums will be identical for identical plans offered on and off-exchange. HHS clarified this again in the 2014 Benefit and Payment Parameters (see page 15497).

That takes us back to our administration fee calculation… we already know that the total amount that must be collected is $350. But we can’t just tack it onto the premiums for the plans sold in the exchange, because that would run afoul of 45 CFR 156.80. Instead, the carrier has to take the $350 fee and spread it across all 200 plans, resulting in a portion of the fee being paid by all enrollees in that carrier’s plans, regardless of whether they got their plan through the exchange or not.

And there we have the issue that Senator Lundberg is addressing in SB2. The legislation calls for asking the voters in Colorado whether or not Connect for Health Colorado should be able to generate revenue via the administrative fee, which – under the guidelines of the ACA – must be spread across each exchange carrier’s entire book of business.

The problem with letting the voters decide this issue is that there isn’t any way around it, no matter what the voters decide. If by some chance, the legislation were to pass and voters were to reject the administrative fee, Connect for Health Colorado would certainly be in a tight spot in terms of funding. But even in a worst-case scenario, if Connect for Health Colorado were to have to close up shop entirely as a result of losing the administrative fee, Colorado would still have an exchange.

It would be Healthcare.gov, where the administrative fee is also 3.5% of premiums. And the regulations in 45 CFR 156.80 would still apply, which means the fee would still be spread across each exchange carrier’s entire book of business. And it would be assessed by a federal entity rather than a state entity, which means TABOR would not apply.

Long story short… SB2 seems like it might be a waste of time. The legislation implies that the admin fee is in violation of TABOR because the voters didn’t agree to the admin fee being spread across a carrier’s off-exchange business. But the requirement that exchange user fees be spread across each carrier’s full book of business is a federal regulation, not a state regulation. And the alternative to Connect for Health Colorado is Healthcare.gov – under which the state would have very limited control over how the exchange operates, and which would still involve a 3.5% administrative fee, spread across each exchange carrier’s full book of business.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

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