So far, the CMS has dispensed more than $4 billion in grants to help launch state-run exchanges. In December, the agency issued its final round of grants, roughly $265 million to 10 states with existing state-run marketplaces, to assist with technology development and enrollment efforts. Despite the influx of federal funds, many state-based exchanges are facing projected deficits this year and in future years.
Colorado, Oregon and Rhode Island are considering abandoning their state-run exchanges and using the federal exchange because of financial struggles. An independent audit of Colorado's marketplace released in December found lax financial controls resulting in questionable payments and contracts.
State-run exchanges have faced many problems in becoming self-supporting. State legislators have been reluctant to establish or increase fees on premiums to support exchange operations. Solving unexpectedly severe website technology problems has cost a lot of money. In states with fee assessments on exchange-plan premiums, smaller-than-expected enrollment has yielded inadequate revenue. And the problem is circular: Cutting back exchange activities because of budget shortfalls has hurt outreach and sign-up efforts, further reducing enrollment.
“Many state-based exchanges have a good amount of work to do before they find a sustainable financial model,” said Elizabeth Carpenter, a director at the consulting firm Avalere Health.
The financial problems facing state-based exchanges could become a major problem for the Obama administration. If the Supreme Court strikes down premium subsidies in states using the federal exchange, those states may be reluctant to set up their own exchanges if they can't see a viable way of funding their operations.
Financial sustainability is one of the main impediments holding states back from creating their own exchanges, said Dan Schuyler, senior director of exchange technology at consultancy Leavitt Partners. “It's too early to tell which state sustainability models will work and which models won't work,” he said.
Politically, state Republican lawmakers as well as congressional Republicans are likely to challenge the continued operation of state exchanges if they are losing money and require funding from other state or federal sources. Indeed, U.S. Rep. James Lankford (R-Okla.) raised the issue in questioning CMS Administrator Marilyn Tavenner at a hearing in December before the House Committee on Oversight and Government Reform. “The law requires that they be self sufficient by (Jan. 1, 2015),” Lankford said. “Will they get federal dollars, contrary to the law saying they must be self-sufficient?”
Tavenner would not say whether federal funds would continue to flow in 2015.
Most states are relying on fees imposed on premiums for health plans purchased through the exchanges. California is charging a $13.95 per-member per-month assessment. Four states and the District of Columbia are levying fees on plans purchased inside and outside the exchanges, a move that has sparked opposition from insurers. Three states—New Mexico, Rhode Island and Vermont—have yet to establish any means of paying for exchange operations.
Officials in Oregon, which experienced severe technology problems with its exchange website during the first open enrollment and switched to using the federal HealthCare.gov website, are considering dissolving the Cover Oregon exchange. Cover Oregon is projecting a $2 million deficit for 2015, and critics say the shortfall could be significantly larger.
State Sen. Brian Boquist, a Republican who sits on the joint committee that is mulling Oregon's options, said turning over all exchange functions to the federal government is risky because of the Supreme Court subsidies case. But keeping the status quo, with the state handling outreach and communication, may not be tenable financially. The exchange already has cut back on marketing and call-center activities to conserve federal grant dollars for 2015, which observers say has contributed to lower than-projected enrollment—and hence less money for operations.
Cover Oregon officials declined to comment, referring to budget documents available on their website.
In Minnesota, whose MNsure exchange also experienced severe IT problems and lower-than-projected enrollment during the first open enrollment, the state Legislature established a tax on premiums of 3.5%. But the premium fees will generate only $5.3 million of the $85.8 million budget for MNsure for this fiscal year. For the next fiscal year, which begins July 1, premium taxes are expected to rise to $10.6 million, covering roughly a quarter of the proposed budget. The bulk of the remaining dollars, $26.1 million, will come from the state Department of Human Services, which runs Minnesota's Medicaid program. By 2017, the share of dollars expected to come from DHS amounts to two-thirds of the budget.
Ostensibly, DHS is reimbursing MNsure for its services in signing up residents for Medicaid and other public programs. But Republican state Sen. Michelle Benson questions the legitimacy of transferring money from DHS to MNsure when the bulk of public-program enrollments are handled by other agencies. “They haven't taken any burden off of DHS and they haven't taken any burden off the counties,” Benson said. “We're double paying.”
Washington state's Health Benefit Exchange, which has enjoyed relatively strong enrollment and experienced fewer IT problems, is facing a $4.5 million deficit under its $59.2 million funding request to the state Legislature for 2015. The deficit is projected to be larger in 2016—$5.5 million in a potential $75.7 million budget. Exchange spokesman Michael Marchand said the exchange would face additional costs when it dismantles its system for having customers pay premiums directly to the exchange.
The exchange's budget request likely will require additional fees on premiums in the future because the Legislature probably won't be willing to allocate a greater share of general funds to the exchange, said Sydney Smith Zvara, executive director of the Association of Washington Healthcare Plans.