Funding Woes Endanger Future of State-Run Health Exchanges

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.