"If Kentucky did not operate its own exchange, based on premium volume, the federal user fee has the potential of generating more than would be needed to support a state-based exchange," said Carrie Banahan, executive director of the Kentucky exchange. "And Kentucky policy holders and insurers could essentially be subsidizing the costs of other states."
Kentucky is one of 17 states that the U.S. Department of Health and Human Services approved to build their own exchanges to provide one-stop shopping for health insurance. Open enrollment begins Oct. 1 and the exchanges start operations next Jan. 1. Meanwhile, 21 states have declined to set up exchanges, which means federal authorities will set up and operate the new insurance marketplaces for them. Another three states have gotten the go-ahead for federal-state partnerships.
Startup costs for the Kentucky exchange are being covered by federal grants, but the state will be responsible for all funding beginning in 2015. Banahan said options being considered include using revenue from the existing 1 percent fee on insurance premiums. That would generate about $26 million a year. Additional money could come from a pool of funds from a legal settlement with tobacco companies.
"I want to clarify that no final decisions have been made on the funding mechanism," Banahan said. "We're just considering that at this time."
Gov. Steve Beshear created the state health benefit exchange by executive order last July to help an estimated 641,000 uninsured Kentuckians get coverage. Many of those will also get help paying their premiums through the exchange.
Kentucky has already received $252 million from the federal government to set up the exchange.
Budget documents show the biggest expenses for Kentucky's exchange include $10.8 million a year for staffing, $3.3 million for contracts and memorandums of understanding, $20.5 million for vendors, including a call center contract, $1.2 million for computer hardware and $1.7 million for computer software.
Banahan said 14 employees already have been hired, but that 16 more will be brought on by the end of the year. That's the same number of employees as the secretary of state's office, which oversees elections and business filings with an annual budget of $3.4 million.
Tea party activists in Kentucky have been sharply critical of Beshear's decision to operate a state health insurance exchange, saying taxpayers are having to pick up the bill for an unnecessary government entity. One of those activists, David Adams of Nicholasville, said he was shocked by the cost of the exchange.
"It's an unadulterated spending orgy," he said.
Adams, once the campaign manager of U.S. Sen. Rand Paul and a critic of the healthcare reforms, said Banahan is "blowing smoke" about operating a frugal health benefit exchange.
"We need full, open hearings on all this before we spend another dime," he said.
Banahan said Adams' opposition isn't the norm in Kentucky.
"We're hearing very positive things, except from a limited number of folks," she said. "I don't really understand the opposition, because, if we didn't do a state-based exchange, we'd default to the federal government."