Background:

Insurance Premium Tax.

With some exceptions, insurance companies must pay a 2 percent insurance premium tax to the state. The tax is imposed on the total amount of all premiums and prepayments for health care services collected or received by the insurer during the preceding calendar year. Insurers must prepay their tax obligations. By June 15 insurers must pay 45 percent of their tax obligations. On September and December 15 they must pay 25 percent. Revenues from the tax are deposited in the State General Fund. Dental plans and benefits provided by health care services contractors are exempt from the premium tax.

Expenditure Limit.

The State General Fund is subject to a spending limit. The State Expenditure Limit Committee (Committee) was established in 2000 for the purpose of determining and adjusting the state expenditure limit. Each November, the Committee adjusts the limit for the previous and current fiscal years, and projects a limit for the following two years.

If the cost of a state program or function is shifted from the State General Fund to another source of funding, or if funds are transferred from the State General Fund to another fund or account, the Committee must lower the expenditure limit to reflect the shift.

Health Benefit Exchange.

The Washington Health Benefit Exchange (Exchange) will be an online marketplace for individuals, families, and small businesses in Washington to compare and enroll in health insurance coverage and gain access to tax credits, reduced cost sharing, and public programs such as Medicaid. The Exchange will begin enrolling consumers on October 1, 2013, for health insurance coverage beginning on January 1, 2014.

The Exchange was established as a self-sustaining public-private partnership that is separate and distinct from the state. To be "self-sustaining," the Exchange must be capable of operating without direct state tax subsidy. Self-sustaining sources of revenue include federal grants, federal premium tax subsidies and credits, charges to health carriers, and premiums paid by enrollees.

Development of the Exchange is funded primarily through federal grants that end before 2015. The Exchange was directed to report to the Governor and the Legislature with recommendations for development of sustainable funding for administration of the Exchange starting in 2015. The Exchange provided three options: increase the current insurance premium tax, apportion to the Exchange the premium taxes collected on all premiums for health care services attributable to the Exchange, and/or assess a service charge on plans sold through the Exchange.

Washington State Health Insurance Pool.

The Washington State Health Insurance Pool (WSHIP) is the high risk health insurance pool for the state of Washington. It offers insurance coverage for state residents who are rejected for coverage in the individual market. The WSHIP is subsidized through an assessment on insurance plans.

Health Benefit Exchange Account.

The Health Benefit Exchange Account (Account) holds all receipts from federal grants received under the federal Affordable Care Act (ACA), and funds in the account may only be used for purposes consistent with those grants. The Exchange may authorize expenditures from the Account. The Account expires on January 1, 2014.

Business and Occupation Tax.

Almost all businesses located or doing business in Washington are subject to the state business and occupation (B&O) tax. The B&O tax is imposed on the gross receipts of business activities conducted within the state. Revenues are deposited in the State General Fund.

The classification and rate of the B&O tax is based on the type of business activity. The most common types of activities include retailing, wholesaling, manufacturing, and services and other activities, such as sales commissions. There are several rate categories, and a business may be subject to more than one B&O tax rate, depending on the types of activities conducted. There are many exemptions for specific types of business activities, and certain deductions and credits are permitted under the B&O tax statutes.

Summary of Engrossed Substitute Bill:

Insurance Premium Tax.

Beginning January 1, 2014, insurance premium taxes collected on medical and stand-alone dental plans offered through the Exchange must be deposited in the Account.

The requirement that the Committee must reduce the expenditure limit to reflect any transfers from the State General Fund to other funds or accounts does not apply to the dedication of insurance premium taxes to the Account.

Health Benefit Exchange.

"Self-sustaining" is defined to mean capable of operating with revenue attributable to the operation of the Exchange, and insurance premium taxes are included in the list of self-sustaining sources.

Beginning January 1, 2015, the Exchange may impose an assessment on health and dental plans sold through the Exchange in an amount necessary to fund the operations of the Exchange in the following calendar year. The Exchange may only impose the assessment if the expected insurance premium taxes and other funds deposited in the Account are insufficient to fund the Exchange's operations in the following calendar year at the level appropriated by the Legislature in the omnibus appropriations act.

The Exchange, in collaboration with the issuers, the Health Care Authority, and the Insurance Commissioner, must establish a fair and transparent process for calculating the assessment amount. The assessment only applies to issuers that offer coverage in the Exchange and only for those market segments offered. The assessment must be based on the number of enrollees in qualified health plans and stand-alone dental plans in the Exchange for a calendar year. The assessment must be established on a flat dollar and cents amount per member per month, and the assessment for dental plans must be proportional to the premiums paid for those plans. The Exchange must notify issuers of the assessment amount on a timely basis and establish an appropriate assessment reconciliation process that is administratively efficient. The assessment will be due in quarterly installments. The Exchange must establish a procedure to allow issuers to have grievances reviewed by an impartial body and reported to the Exchange Board. The Exchange must establish a procedure for enforcement of the assessment. The Exchange must deposit proceeds from the assessment in the Account.

Health benefit plans or stand-alone dental plans may identify the amount of the assessment to enrollees, but the plans may not bill enrollees for the amount of the assessment separately from premiums.

The Exchange must offer all qualified health plans (QHP) through the Exchange, and it may not add criteria for certification of QHPs without specific statutory direction.

The Exchange must monitor enrollment and provide periodic reports that are available on its website. The Exchange must also report quarterly to the Joint Select Committee on Health Care Oversight on budget expenses and operations.

By July 1, 2016, the State Auditor must conduct a performance review of the cost of Exchange operations and make recommendations to the Exchange and the health care committees of the Legislature addressing improvements in cost performance and adoption of best practices. The review must include an evaluation of the potential cost and customer service benefits of regionalization with other state exchanges or partnership with the federal government. The Exchange must pay for the cost of the review.

Washington State Health Insurance Pool.

The WSHIP Administrator is directed to continue collecting assessments for the high risk pool in 2014. The Administrator will also assess an additional amount specified in the operating budget for transfer to the Account to assist with the transition of enrollees from the WSHIP to the Exchange. The WSHIP assessment may not exceed the 2013 assessment level.

Health Benefit Exchange Account.

Moneys in the Account may only be spent after appropriation, and expenditures may only be used for Exchange operations and the identification, collection, and distribution of premium taxes that go into the Account.

Insurance premium taxes and Exchange assessments are included in the list of funds that must be deposited in the Account.

The Legislature may transfer excess funds from the Account to the State General Fund in the 2013-15 fiscal biennium.

The expiration date of the Account is removed.

Business and Occupation Tax.

The Exchange is exempt from the B&O tax until July 1, 2023. The exemption applies both prospectively and retrospectively.

Staff Summary of Public Testimony:

(In support) If carriers decide they want to include the costs of the assessments in premiums for plans outside of the Exchange they can, and the bill gives them that flexibility. This bill is based on "option two" for self-sustainability proposed by the Exchange. There was a lot of desire to keep costs within the Exchange plans, which is what "option two" attempts to achieve.

The bill attempts to do two things. First, it provides legislative control and accountability over the Exchange. Second, it broadens the funding base by including premium tax revenues from health plans sold in the Exchange and health plans for clients enrolling in the Medicaid expansion, neither of which would exist but for the passage of the Affordable Care Act (ACA).

If one assumes that the proposed Exchange budget stays as is and that enrollment estimates stay as they are, the Exchange would charge plans $12.50 per member per month (PMPM). By allowing the Exchange to use these premium taxes, the PMPM is $2.50. This is a significant benefit to the Exchange that will help make it work.

(In support with amendment(s)) The hybrid approach in "option two" is the best approach for creating a viable and stable Exchange. This option places the least amount of pressure on health premium rates. The guiding principle should be that the Exchange is funded from revenue attributed to operations of the Exchange, and costs should not be borne by the outside market.

The premium taxes from the Medicaid expansion should be used to fund Exchange operations because the "no wrong door" policy, eligibility verification, and customer service for the expansion will be handled through the Exchange.

The bill would be better with three clarifications. First, the assessment should be based on business in the Exchange. It should only be collected on plans sold inside the Exchange without being spread on the rest. Second, the cost of the assessment should be transparent to customers at the time of purchase. Like any tax or fee, it should be passed through to the purchaser in the Exchange. The bill should include language that contains the impact of the assessments within the Exchange. Third, in the calculation of medical loss ratios, the Exchange assessment should be considered a fee.

A user fee within the Exchange instead of an assessment on health plans would force the Exchange to provide value to consumers commensurate with its operations. A user fee would inject transparency so users can understand the costs of purchasing through the Exchange.

(Other) The Exchange was directed to create a report making recommendations about financial self-sustainability. The Exchange Board reviewed the issue and discussed it at length, and the Board decided not to take a position on which option to endorse. This bill is largely consistent with "option two," a hybrid option that combines premium taxes related to the Medicaid expansion and plans sold in the Exchange with assessments on plans sold in the Exchange. There are some changes from the hybrid recommendation, but the Exchange has no official position on the bill. The Exchange does have concerns related to the timing of revenue collection and the B&O tax. There is some confusion about how assessments will be spread across the market and how the Exchange may or may not charge people in the Exchange.

(With concerns) The broad based assessment under "option one" would have resulted in a lower assessment on every plan sold in state. It would also have been a more stable source of funding, and everyone will benefit from expanded access. "Option one" is not viable, and "option three" is undesirable because the entire cost of the Exchange would fall on clients in the Exchange. Those are the people that can least afford it, and they are the sickest.

The requirement that the Legislature provide an appropriation for Exchange operations in the budget will help because these clients are the ones that can afford it the least. Clients with chronic disease will buy in the Exchange, so having a legislative hand on the budget will help.

The Medicaid expansion premium taxes should not go to the Exchange. The Exchange is already allocating Medicaid costs to Medicaid. The Exchange is built for Exchange enrollees and Medicaid clients will not have the same options as other clients. Mixed status families will not have tools for continuity of coverage and care. The premium tax money could be put to more appropriate uses.

The bill is overly reliant on unpredictable enrollment numbers. It is unclear how much funding will actually come in.

(Opposed) None.