Understanding The Obamacare “Reinsurance” Fee

A provision of the Affordable Care Act known as the “Transitional Reinsurance Fee” seems to be in the mix as Senators negotiate a way out of the budget impasse. This is a very obscure element of the law that’s important to a number of interest groups, but here’s what the general public needs to know about it:

1. It’s a tax on insurance companies that pays for a subsidy to insurance companies: The underlying issue is that the framers of the Affordable Care Act were concerned that in its early years the ACA exchanges would disproportionately attract older and less healthy applicants. To help ensure that the program got off the ground, it includes federally funded “reinsurance” for health care plans in the exchanges. To avoid turning that into a net subsidy to the insurance industry, the reinsurance is funded by an industry-wide levy on work-provided insurance plans. It’ll be $12 billion in 2014, ratcheting down to $8 billion in 2015, and $5 billion in 2016.

2. It has nothing in particular to do with labor unions: Many people first heard about this reinsurance fee because it was mentioned in the context of a litany of complaints from the AFL-CIO about the Affordable Care Act. Labor essentially asked the Obama administration to exempt their existing insurance plans from the fee. Since this, like most of the other union ACA asks, had no particular merits to it the administration declined.

3. On the merits, undermining Obamacare’s short-term deficit neutrality is fine: For various reasons it was very important to the ACA’s authors that it be deficit-neutral in the short-term and “bend the curve” in the long-term. Bending the curve in the long-term is an important goal, but deficit neutrality in 2014 is not. The case against the reinsurance fee on the merits is weak, but the case for worrying about excessively loose fiscal policy in 2014 is even weaker.