States struggle to fund Obamacare exchanges in 2015

States across the country are scrambling to find a viable model to fund their Obamacare insurance exchanges in 2015, when the healthcare reform law weans state-run exchanges from federal support and requires them to be financially self-sufficient.

While many of the 14 states running their own individual-market exchanges will have leftover federal dollars to use to ease the transition to financial independence, finding a politically acceptable funding scheme is proving a vexing problem.

“The reality is that sustainability is now rearing its ugly head,” said Dan Schuyler, director of exchange technology at the consulting firm Leavitt Partners. “Twelve months ago it wasn't an issue because states were really just scrambling to build these exchanges.”

States have received $4.7 billion in exchange funding from the federal government, according to the Kaiser Family Foundation, with 16 getting more than $100 million each. But new federal grant dollars disappear after this year.

Efforts to establish funding mechanisms were made politically harder by the technology problems many state-run exchanges experienced. To save money, some critics in states with troubled exchanges have urged switching to the federal exchange. Two states with botched exchanges, Oregon and Nevada, have decided to use the federal exchange for 2015.

But even in states that experienced relatively smooth enrollment, establishing a stable funding source has proved difficult. That's in part because the effort is seen as a tax increase, which is always an uphill battle. But it's exacerbated by the continuing unpopularity of the Patient Protection and Affordable Care Act. In addition, insurers warn that piling on more fees will make plans less affordable. Some states are seeking to spread the financial pain by imposing fees on all health-related insurance products, including dental and disability plans, or on plans both in and out of the exchanges. Other states seek to generate revenue by selling successful exchange technology to other states. Another possible cost-saving solution being discussed is sharing some exchange costs across state lines or even combining exchanges.

The 2015 budget for Minnesota's exchange, MNsure, is expected to total less than $40 million. Just $5 million of that amount will come from federal grants and $22.2 million will come from federal Medicaid dollars. The state's share, $11.7 million, will come from raising the premium tax on plans sold through the exchange from 1.5% to 3.5%, the maximum allowed under state law. By contrast, 98% of MNsure's $127 million budget for 2014 was funded by federal grants or Medicaid dollars.

MNsure was initially beset by technological problems. But worries have faded that premium-based taxes would be far less than needed because exchange signups surged at the end of open enrollment in March and April. State Rep. Joe Atkins (D-Inver Grove Heights), who spearheaded the creation of the state exchange, expressed optimism that there would be enough money to pay for operations in 2015. “Six months ago, I would have been much more concerned,” Atkins said. “I am many multiple times more confident now.”

But insurers are raising concerns. Eileen Smith, a spokeswoman for the Minnesota Council of Health Plans, said state and federal taxes in recent years have boosted premiums by 10% to 12% in the state. “At a time when we're trying to make health insurance more affordable, it makes it less affordable,” she said.

In April, Washington's city council unanimously passed a tax of up to 1% on all health-related insurance premiums paid by city residents, even those purchased outside the district-run exchange, and including ancillary coverage such as dental or vision plans. The fee sparked controversy, including the threat of a lawsuit by insurers that aren't participating in the exchange.

In Colorado, the state exchange's board of directors recently approved a $66 million budget for fiscal 2015, including a $1.25 per member monthly fee on individual and small-group health plans, regardless of whether they were purchased through the state's exchange. That's projected to raise $13 million a year. In addition, the state has imposed a 1.4% fee on premiums paid through the state's exchange.

That has sparked heated opposition, including charges that the $1.25 fee is an illegal tax hike because it was not approved by voters. “We have a law here in Colorado that says you can't increase taxes without a vote of the people,” state Sen. Owen Hill, (R-Colorado Springs), who sits on the exchange's legislative oversight committee, told Colorado Health News.

The issue has even seeped into the state's hotly contested U.S. Senate contest. GOP challenger Cory Gardner has used the $1.25 fee to bludgeon Democratic Sen. Mark Udall, a strong supporter of the federal healthcare law.

Rhode Island, which has had a successful exchange, has no plan in place to pay for exchange operations once federal dollars run out. That's not an immediate problem because the state has spent only $54 million of its $140 million in federal grants. The discussion about how to fund exchange operations in future years is not expected to take place until after the fall elections, said Christine Hunsinger, a spokeswoman for HealthSource RI. In the meantime, the state is looking to make money to use for exchange operations by selling other states the software it has used successfully for its small-business exchange.

Leavitt's Schuyler said states need to come up with creative solutions to make the exchanges financially sustainable. He thinks they should explore sharing some costly functions across state lines, such as staffing call centers. “That is one model that has a lot of viability,” he said.

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