State Marketplace Approaches to Financing and Sustainability
The Affordable Care Act provided significant start-up funds—over $4 billion has been awarded thus far—to help states set up their health insurance marketplaces. However, after January 1, 2015, there will be no more federal establishment funds awarded and state-based marketplaces, including those using the federal IT platform, must be financially self-sustaining.1
Marketplaces may use a variety of approaches to fund their operations, including user fees, state appropriations, or redirecting existing revenue sources. To date, most states have instituted user fees on plans sold through the marketplace as their primary financing mechanism, with assessments for 2015 ranging from 1 percent to 3.5 percent of monthly premiums (Exhibits 1 and 2).2 The federal marketplace, Healthcare.gov, will be financed by a monthly user fee equal to 3.5 percent of premiums for plans sold through the marketplace.
Exhibit 1. State-Based Marketplace Financing Mechanisms for Individual Marketplaces*
Long-Term Revenue Source to
Fund Marketplace Operations
|Assessment only on plans offered through the marketplace1||California, Hawaii, Idaho, Massachusetts, Minnesota, Nevada, Oregon, Washington||Washington instituted an additional $4.19 PMPM assessment on marketplace carriers to supplement its share of the state’s existing 2% premium tax.|
|Broad-based assessment on plans inside and outside of the marketplace2||Colorado, Connecticut, District of Columbia, Kentucky, Maryland||Colorado is assessing a $1.25 PMPM fee on all plans offered inside and outside of the marketplace in addition to a 1.4% assessment only on marketplace plans, as well as using revenue from other sources.|
|State appropriations only||New York|
|Long-term financing mechanism not finalized||New Mexico, Rhode Island, Vermont||Vermont is temporarily funding its marketplace through June 2015 through its State Healthcare Resources Fund, which is funded through an insurer assessment, employer assessment, and other revenue streams. Rhode Island is using federal grant funds while developing a sustainability plan.|
* This table reflects state-based marketplace decisions for individual marketplaces as of October 15, 2014, for policy or plan years beginning on or after January 1, 2015. Some states are using multiple funding sources.
1 Oregon and Washington State also have broad-based assessments on insurers selling both inside and outside of the marketplaces. However, Cover Oregon and the Washington Health Benefit Exchange retain the assessment only from the plans sold through the marketplaces.
2 Kentucky and Maryland applied an existing assessment on insurers throughout the state to marketplace operations.
PMPM is per member per month.
Key Considerations for Sustainability
In developing their financing mechanisms, states have sought to minimize excess costs for consumers while ensuring sufficient revenue for ongoing operations. To determine an adequate level of funding, marketplaces must weigh key factors including their overall operating budget, enrollment estimates, and the projected premiums on which any assessments will be based.
- How Much Funding Is Needed? Operating budgets for state-based marketplaces are directly related to the assessment levels that marketplaces charge. In developing those budgets, states must prioritize operational features that in some cases could affect enrollment. For example, a Nevada financing report shows the estimated impact of increased funding for navigators, marketing, and advertising on the per-member, per-month cost of operating the marketplace.
- Will Enrollment be Sufficient to Generate Adequate Revenue? Because most states are funding their marketplaces through an assessment related to per-person, per-month enrollment or a percentage of premiums collected, enrollment levels will be critical. For example, in California, sign-ups on the low end of expectations could mean $75 million less in revenue, compared with medium-enrollment scenarios. Another illustrative example from a Nevada report indicated that their insurer fee could decrease from $11.17 to $7.44 per-member, per-month if enrollment increased from 25,000 to 100,000.
- Will Premiums Match Projections? The premiums on which state assessments are based are also important: lower premiums could mean lower overall revenue, unless they also drive higher enrollment. For example, Connecticut estimates it will have a shortfall in premium assessment collections for 2015 because individual and small-group premiums on which its assessments are based rose less than expected.
- Who Should Pay into Marketplace Operations? States have taken different approaches to the question of how broadly insurers should share the costs for marketplace operations. Most states are relying on insurer assessments to fund their marketplaces, based on the rationale that participating insurers will benefit from an expanded customer base. But Colorado, Connecticut, Kentucky, Maryland, and the District of Columbia are using broad-based assessments that apply to plans sold both inside and outside the marketplaces in order to fund their operations.
While insurers that choose not to participate in the marketplace may argue that they should not be required to help fund it, proponents of broad-based assessments argue that all insurers stand to benefit from a well-functioning health insurance marketplace that increases the ranks of the insured. Additionally, insofar as insurers consider marketplace fees as a factor in deciding whether to participate, broad-based assessments may help level the playing field between insurers selling on and off the marketplace. Such assessments may also reduce the overall assessment amount per insurer and relieve pressure on the marketplace to achieve higher enrollment levels. For example, when the District of Columbia developed its funding options, early estimates indicated that its marketplace budget would require an assessment of nearly 16 percent to fund operations if applied only to marketplace insurers, while a fee of only 0.87 percent would be sufficient if applied to all D.C. health insurance carriers.
Exhibit 2. Assessment Levels on Individual Market Qualified Health Plans, 2014–15
|State||Insurer Assessment Levels*
Percent of premium or per-member per-month (PMPM) fee
Federally facilitated marketplace
|California||$13.95 PMPM||$13.95 PMPM|
|Colorado||1.4% plus $1.80 PMPM broad-based fee||1.4% plus $1.25 PMPM broad-based fee|
|District of Columbia||—||1%|
|Nevada||$4.95 PMPM||$13 PMPM|
|Oregon||$9.38 PMPM||$9.66 PMPM|
|Washington||—||2% plus $4.19 PMPM|
* This table reflects assessments on Qualified Health Plans offered for sale through health insurance marketplaces in the individual market only. Some states have different assessment levels for insurers offering coverage in the Small Business Health Options Program (SHOP) marketplaces or for dental plans.
1 The Massachusetts Connector temporarily suspended charging its existing insurer fees for calendar year 2014, with the stated plan to reintroduce them for 2015 and beyond. Massachusetts is charging a different fee of 3% on insurers offering ConnectorCare plans, which offer additional cost-sharing assistance for lower-income individuals.
Ensuring Long-Term Sustainability
With billions of federal dollars now invested in launching them, state-based marketplaces face significant pressure to implement sustainable funding mechanisms next year that will allow them to operate independently. Although the success of these efforts will depend on multiple factors, the fact that most states’ funding mechanisms are tied to per-member enrollment fees, or to a percentage of premiums collected, means a key indicator of success will be enrollment levels during the 2014–15 open enrollment period. While some observers have suggested that state-based marketplaces with financing challenges should relinquish their operations to the federal government, such transitions would entail a loss of state autonomy and potential disruptions for consumers and insurers. Going forward, the success of funding mechanisms is instead more likely to affect the level at which states can fund important marketplace functions, including consumer assistance and outreach. Meanwhile, states are likely to continue looking for ways to maximize enrollment and minimize operating costs with an eye toward ensuring their long-term stability.
1 States may request extensions allowing them to use existing grant funding after January 2015 for certain purposes, such as the continued development of IT systems, but these funds may not cover ongoing maintenance or operational costs.
2 Some states have considered supplementing their revenue with other funding sources, like selling products or expertise to other states. For example, Connecticut is marketing the expertise of its people and the processes it has developed to other states through a separate business, Access Health Exchange Solutions, in an effort to lessen the cost of development for states seeking to transition from the federally facilitated marketplace, and to help sustain Access Health CT. Similarly, it has been suggested that states might share the cost of key functions with other states, or even enter into regional marketplaces, to reduce their costs, but such discussions are largely in their infancy.