The current major challenge to the Affordable Care Act will come to a head this month when the Supreme Court rules on King v. Burwell. The court will decide whether it is permissible for the federally run health insurance exchanges, which operate in two-thirds of the states, to offer subsidies and tax credits to the limited-income people who account for more than 80% of those enrolled in the federally run exchanges. Without financial assistance, healthy people will likely opt out, leaving the federal exchanges with a smaller and sicker population. Unable to spread risk, insurers will raise rates, thereby driving out even more healthy people. This is the much-feared “death spiral” that ACA-watchers have worried about since before the law's passage. But it is not the only significant challenge to the health insurance exchanges.
Unfortunately, the track record of the state-run exchanges, which operate in the remaining one-third of the states, is, at best, uneven. It appears that the Hawaii exchange has failed and Hawaii will probably default to the federal platform. Other states, including Nevada and Oregon, previously failed. In those states, the feds are now handling the hardest part of running an exchange—determining eligibility for financial assistance and processing enrollments. Officially, those states are “supported” state exchanges, but that is a marriage of convenience that allows the state and the feds (who provided generous start-up grants) to save face. Other state exchanges—Maryland and Massachusetts to name just two—are troubled. HHS' Office of Inspector General recently concluded that Maryland “misallocated” $28.4 million of its federal grant; the Justice Department recently subpoenaed records from the Massachusetts exchange.
Running a health insurance exchange, it turns out, is harder than anyone expected. In addition to building the information-technology system, the exchange must complete difficult annual negotiations with insurers, convince hard-to-reach populations to purchase insurance, and manage a complex set of enrollment and financial transactions. The much-maligned HealthCare.gov website lacks flexibility and needs various consumer-facing and back-office upgrades. But it works, and it is getting better.
The long-term problem of the state-run exchanges—particularly in small states—is lack of scale. There are high costs associated with running an exchange and many of those costs are fixed or largely fixed. The states that have attempted to build their own exchanges (and received federal grants totaling between $90 million and $1 billion) will soon be out of grant money. Only one state (Vermont) has committed state appropriations for ongoing exchange operations. Others are assessing health plans for the costs of ongoing exchange operations, and several states are raising initially low assessments. Rapidly rising assessments could lead to big rate hikes and chase away healthy purchasers, thus starting the death spiral. Even the most successful small-state exchanges, such as those in Connecticut and Kentucky, might not be insulated from this problem.
There are a few ways out of this box. State exchanges could pool resources or lease working systems from each other. Maryland is now leasing Connecticut's platform—that could be a role model. Several states have broadened their assessment base to include off-exchange plans. A few states have discussed adding non-health insurance products onto their exchanges in the interest of further broadening the base of fee-payers.
However, the best long-term solution—and the one that, in retrospect, should have been written into the ACA—may be creating a flexible national platform that provides some customization for states, and allows the feds to collect a fee from states using the national platform. This would create the scale necessary to hold down operating costs (and therefore rates) and let the states provide consumer assistance. Relieved of eligibility and enrollment responsibilities, more states might come into the mix. Unfortunately, the ACA does not foreshadow this solution; the law considers state-to-state cooperation, but state-run and federally run exchanges were written as a binary proposition.
Regardless of the outcome of King v. Burwell, the viability of state-run exchanges, particularly in small states, is the next (and perhaps final) major challenge to the ACA. In the aftermath of King, Congress will again consider revisiting the ACA, and there are a few inklings that the debate is ready to detoxify. If that happens, there is a pragmatic path toward long-term exchange viability.
Mike Adelberg is a senior director at FaegreBD Consulting in Washington. Previously, he was the director of the insurance programs group and acting director of the exchange policy and operations group in the Center for Consumer Information and Insurance Oversight within the CMS, where until three months ago, he oversaw daily operations of the federally run exchanges.
