Could Funding Woes Imperil Future of State-Run Exchanges?

Source: Modern Healthcare

Starting this month, state-run insurance exchanges are legally required by the healthcare reform law to be financially self-sustaining. But that mandate is being ignored across the country, and there do not appear to be any immediate consequences for the states.

Many of the 16 states and the District of Columbia that run their own marketplaces will continue to rely on leftover federal funds to pay for operations this year. The Obama administration issued a guidance last year that states can continue to use federal grant dollars this year if the CMS grants permission. Some uses of the funds are prohibited, such as for rent and software maintenance.

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.

In Rhode Island, the Legislature has not enacted any funding mechanism for the state-run marketplace, HealthSource RI, which was established through the governor’s executive order. Instead, the exchange has relied on $140 million in federal grants. Rhode Island already has spent nearly $50 million of that grant funding for exchange operations, according to an October report by the nonpartisan Rhode Island Public Expenditure Council.

Skeptics have questioned whether Rhode Island and other states with small populations can come up with viable mechanisms to generate sufficient revenue to pay for operations. Some observers argue they either need to combine forces with neighboring states or default to the federal exchange.

In fiscal 2016, which starts July 1, HealthSource RI is expected to have an annual budget of roughly $24 million. Even if every one of the 70,000 state residents eligible to seek coverage through the exchange signed up, it would cost nearly $30 per member per month to cover the exchange’s anticipated budget. That means any funding solution likely would require taxing a broader population than only exchange customers.

The cost has sparked a backlash. The state’s largest newspaper, the Providence Journal, called for scrapping the exchange and shifting to the federal marketplace. Last year, a bipartisan group of state legislators introduced legislation that would prohibit the state from spending money on exchange operations. Republican Rep. Patricia Morgan, the chief sponsor of the bill, said “we may just be too small of a state” to operate a state-run exchange.

The uncertainty hanging over the Rhode Island marketplace has made it difficult to recruit staff, and customers ask whether they should renew coverage because they heard the exchange might be eliminated, former exchange director Christine Ferguson wrote last year in a letter to the governor.

Even California, with its huge population and notable enrollment success, has had to raise premium assessments to avoid exchange budget problems. This year’s projected Covered California budget shows a 2015-16 deficit of about $4 million. The budget features nearly $100 million more in projected exchange revenue than the previous forecast, because of slightly higher projected enrollment but also higher per-member per-month assessments. In the 2013-14 forecast, the assessment for individual-market plans was supposed to drop to $10.46 in the first half of fiscal 2016 and $9.94 in the second half. Instead, the exchange now projects that fees will remain $13.95 through 2016.

“We’re in a good place,” said Anthony Wright, executive director of consumer advocacy group Health Access California. But he would like to see assessments set slightly higher because that would fund more community outreach and customer service.