Failing by its Own Standard: What DC's Insurance Tax Tells Us About its Obamacare Exchange

May 07, 2014

Yesterday the Washington D.C. Council approved a tax on health insurance products sold in the district in order to fund the $28 million annual budget of its online health insurance exchange, DC Health Link. The tax, at a 1% rate, will be levied on all insurance premiums, not just those sold on the exchange.

This appears to be at odds with the intent of the Affordable Care Act. A CRS paper explains how the exchanges are to be funded:

Under the ACA, each exchange is expected to be self-sustaining beginning January 1, 2015. The law authorizes exchanges to generate funding to sustain their operations, including by assessing fees on participating health insurance issuers. HHS has indicated that to raise funds for each of the FFEs, beginning in 2014, it will assess a monthly fee on each health insurance issuer that offers plans through an FFE.

The expectation was that states would fund their exchanges by levying taxes on exchange users, not on everyone. DC’s policy violates a tax concept called the benefit principle – the idea that government services are sometimes best funded by the people who benefit from them. The best reason for this principle is that it allows us to decide whether a service is worthwhile. The people using the service can themselves decide whether it’s worth its costs.

DC Health Link’s costs per user would become very obvious if they were passed on directly to the user. At $28 million per year, and a net of 24,000 new policies written, the costs of DC Health Link run over $1000 per policy just to run the website. The Washington Post estimated that to cover the full budget from user fees, DC Health Link would have to levy a 17% tax on the plans it sells.

With this sort of transparency, we can see a hard truth about DC Health Link: it is failing to achieve the standards the ACA demands of the private sector. The law mandates that for large employers, 85% of insurance premium costs must go to care and quality improvement, not administrative costs. For individuals and small employers, at least 80%. And here we have DC spending 17% of the premium costs just on the website that lets people sign up. Not on processing claims, not on accounting or actuarial work, not on communicating with providers, not on regulatory compliance. Just on the website.

And that’s just the ongoing expenses. The exchange has already received $134 million in federal grants, or another $5,600 per new policy.

The benefit principle is important because it gets people to honestly evaluate the data. In the case of DC Health Link, the data are not kind.

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