Inside Baseball: Getting the Federal Exchange Right

The Obama administration just released another set of regulations, the “Draft Notice of Benefit and Payment Parameters for 2014.”

Among many other things in the 373 pages, they have announced their proposed assessments to cover the cost of running the federal exchange.

In order for the feds to administer the new insurance exchanges, they have proposed a fee of 3.5% of premium on each insurance policy sold in the exchanges (page 224).

This from the Kaiser Foundation 2011 “Primer” on Medicare:
“The costs of administering the Medicare program have remained low over the years––less than 2% of program expenditures.”

Many times over the years I have heard from advocates of a single-payer Canadian-style health plan that Medicare proves the federal government can do it cheaper than the private sector and should therefore take it all over.

So much for the notion that the feds are the model of insurance efficiency.

Under the new health care law’s Minimum Loss Ratio (MLR) provisions, insurance companies are limited to no more than 20% of premiums for expenses in the small group and individual markets.

The feds just increased those expense ratios by 18%. And, there are some non-profit health plans that operate on MLRs around 10% in this market––this is a 35% increase in their expenses!

Insurance companies are still going to have to issue policies, send bills to customers, pay the claims, and everything else they have always done. Given that insurance brokers will be part of the exchange, and their commissions took a big hit earlier so the health plans could meet the MLR targets, it is hard to see just where the health plans are going to be picking up any expense offsets. There is only one thing the insurance companies can do with this new fee––add it right on top of the premiums they are already charging.

Maybe we need an MLR rule for the feds.

Robert Laszewski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

8 replies »

  1. Yes.

    Not “artificially,” but “actuarially” in the context of a proper 60+ year framing. I don’t buy the validity of one year framing, all it gets you is adverse selection and other administrative waste.

  2. Why? You believe because young people are less likely to purchase insurance we should artificially increase their rate and demand they purchase?

  3. Bob L’s statements that compare the 3.5% user fee for the federally facilitated exchange (FFE) with the 2%-ish Medicare administrative cost are unfortunate. His notion compares two fundamentally-dissimilar administrative objectives. The FFE’s activities are primarily devoted to market-making, whereas CMS’s expenses are primarily devoted to transaction (claims) processing.

    As such, it is a flawed rhetorical device, and an aggregious one at that.

    A far better comparison would be between the huge marginal cost of today’s market-making activities for the Individual and Small-employer markets (e.g., aggregate brokers’ commissions, etc.) and those of the FFEs. Even that comparison would fall short, given that today’s market-making activities occur in the context of severely broken markets that work well for only a tiny minority of market participants.

  4. Bob, the fee of 3.5% seems outrageous.

    “Administering the exchanges” would seem to consist of setting up websites and enrollment software.
    There would also be some review of insurance packages to be sure they were compliant with federal guidelines.

    I am going to take a flying leap and estimate that in Minnesota this might require 100 employees. At $50,000 each the total bill is $5 million.

    Meanwhile, we have to look at projected premiums.

    If 250,000 Minnesotans use the exchanges and the average premium is $4,000 each (including subsidies), then the total premium flow is $1 billon a year.

    So 3.5% of $1 billion is $35 million.

    The Feds are collecting seven times too much!

    If I am wrong, where am I wrong?

  5. What does President Obama’s Draft Notice of Benefit and Payment Parameters for 2014 say? Discuss and debate at Social Number, world’s solitary anonymous social channel.

  6. I’ll repeat what I’ve said here – and everywhere else – for years now: the only way to fix the health insurance market it to break it completely by killing off the employment-as-group-access norm. In other words, sever insurance access from employment.

    Granted, that won’t be feasible to accomplish overnight, but what was supposed to be a short-term fix for wage controls in WWII has turned into a combination gold-rush/drowning-pool, depending on what part of the forest you’re in.

    The nibbling-around-the-edges that constitutes the current iteration of “health care reform” doesn’t effectively address spiraling costs. Only when consumers – commonly called “patients” – are encouraged to ask questions about cost in addition to questions prompted by pharma advertising will we see some real downward pressure on costs.

    We all *should* be buying our own health insurance. Employers can offer payroll deduction programs and/or HSA matching, but putting the cost of health insurance on company balance sheets is the real “job killer”.


  7. “it will be very interesting what happens to the enrollment for young people…their premiums are going to go way up.”

    As they should.

  8. Does the 3.5% count towards the MLR? I assumed not, and it’s crazy if it does. I also saw that a White House spokesperson said they assumed health plans would absorb these costs (just like contraception costs and their other ObamaCare taxes) due to all those new customers. They seem to think health plans are an unlimited piggybank, ignoring that they have the lowest margins in health care.

    Between these & the new age bands it will be very interesting what happens to the enrollment for young people…their premiums are going to go way up.