Almost half of Obamacare exchanges face financial struggles in the future

By Lena H. Sun and Niraj Chokshi May 1 Follow @bylenasun Follow @NirajC

Nearly half of the 17 insurance marketplaces set up by the states and the District under President Obama’s health law are struggling financially, presenting state officials with an unexpected and serious challenge five years after the passage of the landmark Affordable Care Act.

Many of the online exchanges are wrestling with surging costs, especially for balky technology and expensive customer call centers — and tepid enrollment numbers. To ease the fiscal distress, officials are considering raising fees on insurers, sharing costs with other states and pressing state lawmakers for cash infusions. Some are weighing turning over part or all of their troubled marketplaces to the federal exchange, HealthCare.gov, which now works smoothly.

The latest challenges come at a critical time. With two enrollment periods completed, the law has sharply reduced the number of uninsured and is starting to force change in the nation’s sprawling health-care system. But the law remains highly controversial and faces another threat: The Supreme Court will decide by the end of June whether consumers in the 34 states using the federal exchange will be barred from receiving subsidies to buy insurance.

If the court strikes down subsidies in the federal exchange, the states that are struggling financially might be less likely to turn over all operations to the federal marketplace, because they will want to make sure their residents do not lose subsidies to help them buy insurance. If the court upholds subsidies for the federal exchange, some states might step up efforts to transfer operations to HealthCare.gov.

[Millions at risk of losing coverage as Supreme Court weighs Obamacare]

State health insurance marketplaces VIEW GRAPHIC

“Everyone is looking at all the options,” said Jim Wadleigh, executive director of Connecticut’s exchange, considered one of the most successful of the state marketplaces. While states are “trying to find ways to become self-sustaining,” he added, it is an open question whether they will succeed.

States have received nearly $5 billion in federal grants to establish the online marketplaces used by consumers to enroll in health plans under the ACA. The federal funding ended at the beginning of the year, and exchanges now are required to cover their operating costs.

Most exchanges are independent or quasi-independent entities. For most, the main source of income is fees imposed on insurers, which typically are passed on to consumers. Because those fees are based on how many people have signed up (a larger enrollee pool means lower individual costs), strong enrollment is critical to an exchange’s fiscal success.

But for the recently completed open enrollment period, sign-ups for the state marketplaces rose a disappointing 12 percent, to 2.8 million people. That compared with a 61 percent increase for the federal exchange, to 8.8 million people, according to Avalere Health, a consulting firm. States with the smallest enrollment growth are among those facing the greatest financial problems.

Most exchanges have operating budgets of $28 million to $32 million. One of the biggest cost drivers is call centers, where operators answer questions and can sign people up. Enrollment can be a lengthy process — and in several states, contractors are paid by the minute. An even bigger cost involves IT work to correct defective software that might, for example, make mistakes in calculating subsidies.

“A lot of people are going to want to know: What happened to all those taxpayer dollars that went to these IT vendors?” said Sabrina Corlette, project director of Georgetown University’s Center for Health Insurance Reforms.

To shore up their finances, state exchanges are looking at an array of options, although they probably will hold off on making major decisions until after the Supreme Court rules.

“They are literally looking at huge gaps, and they are not sure how they are going to get through the year,” said Caroline F. Pearson, a senior vice president at Avalere Health.

In Minnesota and Vermont, officials are so fed up with costly technical problems in their exchanges that they are considering handing over some or all of their functions to the state or federal governments. Lawmakers in Oregon abolished the state exchange in March, long after it was essentially turned into a gateway to HealthCare.gov.

[These 4 states ditched their faulty enrollment Web sites]

In Rhode Island, the legislature is considering a fee on health plans that would go up or down according to the exchange’s operating costs.

In Hawaii, which has one of the most problem-plagued marketplaces, the exchange needs $28 million to fund operations until 2022, when it is projected to become self-sustaining, officials say. Without the money, “it’s going to be very difficult to keep the doors open,” said Jeff M. Kissel, executive director of Hawaii Health Connector.

As a backup plan, officials are talking to the Obama administration about a possible federal takeover of the marketplace, said an administration official who spoke on the condition of anonymity because the talks are ongoing.

Some states are exploring novel ways to raise funds. The Connecticut exchange is offering to help other marketplaces — for a price. It plans, for example, to renegotiate its call-center contract and share its strategy with other states that use the same contractor, Wadleigh said.

Some state lawmakers express frustration that exchange officials either do not know whether their marketplaces will eventually be self-sufficient or are reluctant to say.

“Basically, the exchange is teetering, and the question is, ‘Can this be shored up?’ ” said Republican Sen. Ellen Roberts, who chairs the committee that oversees Colorado’s exchange board. The cost of running the exchange’s call center is expected to reach $21.3 million for this year. The previous estimate was $13.6 million.

When the ACA was enacted, Democratic governors pressed to create their own exchanges to signal their support for the law and to assert their own authority. Republican governors refused to set up exchanges as “a sort of badge of honor in opposing Obamacare,” said Larry Levitt, a senior vice president at the Henry J. Kaiser Family Foundation. But now, decisions probably will be made on more pragmatic grounds. “It will come down to more of a dollar-and-cents decision,” he said.

Some critics say the states’ problems show that supporters of the law underestimated the practical difficulties of setting up the exchanges. The states are facing “execution problems more than political resistance problems,” said Thomas P. Miller, a health-care policy expert at the American Enterprise Institute.

In Vermont, where the system’s cost is projected to balloon to almost $200 million by the end of the year, officials are eyeing a move to the federal marketplace if things don’t improve. Officials from Vermont, Rhode Island and Connecticut met recently to explore banding together in some sort of regional effort.

In Maryland, where the exchange’s technology problems were so daunting that officials turned to Connecticut for help, officials expect to have enough revenue to cover operations for the fiscal year that begins July 1. If not, the exchange would need to ask the governor for more funds.

Much will depend on how much the call center costs, said Andy Ratner, a spokesman for the marketplace.

[Maryland officials were warned for a year of problems with its exchange]

In Colorado, Connecticut, Kentucky, Maryland and the District, fees to support the exchange are imposed on plans sold on and off the marketplaces. In the District, about $25 million of the exchange’s $28 million budget comes from user fees assessed on insurance products not offered on the exchange. The exchange budget would increase to $32.5 million in the budget year beginning in September under the mayor’s proposed plan. Debra Curtis, deputy director of the exchange, said the marketplace estimates it will raise about $28 million from the assessments and “use existing federal grants for ongoing implementation.”

Even if some state exchanges wind up handing the reins to HealthCare.gov, doing so is not free. Each exchange would have to be made compatible with the federal marketplace at a cost of about $10 million per exchange, Wadleigh said.

Aaron Davis and Alice Crites contributed to this report.