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State Health Exchanges Wrestle with Budgets

By Erin Mershon, CQ Roll Call

July 25, 2016 -- State-based marketplaces survived start-up problems with botched technology and political threats but continue to grapple with a fundamental challenge: financial sustainability.

The 13 states that run their own exchanges face challenges in raising enough money, through user fees or state funding, to maintain their operations now that about $5 billion in early federal grants has largely run out. As states establish those budgets, they are testing decidedly disparate approaches to investments in priorities like marketing, technology and operations.

Those questions underscore a major endurance test for a signature piece of the health law. Together, the state-based exchanges enroll more than three million Americans. And like, they are at the center of the political firestorm surrounding the law.

The issues will be at the center of a discussion Tuesday and Wednesday between federal officials and many state exchange representatives. Centers for Medicare and Medicaid Services (CMS) officials who oversee the exchanges hope to ascertain what's working, and what's not, to ensure the exchanges are equipped for the upcoming fourth open enrollment period, according to state officials. CMS did not comment on the meeting.

"The marketplaces are having to make some sort of tough choices," said Jennifer Tolbert, director of state health reform at the Kaiser Family Foundation. "They're trying to figure out how to balance all of the competing needs that they have for a well-run, well-functioning marketplace with, in some cases, some more limited dollars."

Every state-based exchange had to rely on federal funding for some activities during the 2016 fiscal year—despite a provision in the law requiring self-sufficiency by the start of 2015. The Obama administration offered states a "no-cost extension" to keep using grant money for some activities through the end of this calendar year. In June, it extended that into 2017.

Financial Issues

Already, the 13 remaining exchanges have overcome a litany of obstacles that shuttered marketplaces in Hawaii and Oregon. In recent interviews, officials in many states painted an optimistic picture of the path forward, now that they have experienced three enrollment periods. But they also acknowledged the challenges.

Most exchanges are funded through user fees, assessed on every enrolled exchange customer every month. Some charge a monthly dollar fee, ranging from $7 per member per month to just shy of $14. Others charge a percentage of the premium, often between 1 percent and 3 percent. In states that use the federal website, the premium assessment is 3.5 percent. Others rely partly on state appropriations; New York relies on them in full.

Those fees, however, aren't always sufficient to cover operations, especially when enrollment is low—leaving some exchanges facing the threat of deficits. Ongoing technology maintenance, too, is taking a bigger bite out of many budgets than expected.

Officials in states like Washington and Vermont turned to state legislatures to beg for last-minute grants to cover shortfalls after facing lower-than-expected enrollment, switching technology contracts or suffering from mismanagement. Some states, including Colorado and Connecticut, hiked their fees as a way to make up for lost grant revenue.

"Exchanges are going to have to continue to wrestle with sustainability long term," said Elizabeth Carpenter, a senior vice president for Avalere Health, adding that many state and federal officials overestimated how many people would enroll, especially at the start. "The question looking ahead is at what pace does enrollment continue to grow?  . . .  Are you able to achieve sufficient efficiency given the number of lives that you have?"

The financial and management issues—and the lost startup funds—are a target for congressional Republicans. They have blasted federal officials for poor oversight and continue to attack CMS for failing to collect refunds from exchanges that have flopped or inappropriately spent their federal grants. The House Energy and Commerce Committee is investigating how the states are spending those funds. Republicans also say CMS Acting Director Andy Slavitt's congressional testimony inflated the amount of grants that the agency recaptured.

Taxpayers are out billions because the administration treated the grants like a slush fund, a committee aide argued in an interview. If CMS had conducted basic oversight perhaps some exchanges would be in a better place financially, the aide added. Lawmakers are still determining how and when to proceed with the investigation and release its results.

But in interviews, officials for nine of the country's 17 state-run and state partnership marketplaces were optimistic, describing themselves as fledgling businesses figuring out how to set their budgets and priorities. They say they are now poised to succeed and are relying on very little of the federal grant money, if any.

The first couple of cycles, it was just lurching from crisis to crisis on really tight time frames.  . . .  but for most of them now, we're past the initial hump of 'How do I just make sure the lights stay on?'" said Sabrina Corlette, a professor at Georgetown University's Center on Health Insurance Reforms. "Many of them are now able to pivot to longer-term issues, in terms of how do we go after the remaining uninsured, how do we make sure we can deliver a product that is of value."

States' Experiences

Those priorities, however, differ in every state, depending on the population's needs, the number of uninsured people and the resources available.

Rhode Island saw its initial $50 million budget in 2015 drop to just $12 million for 2017. Zachary Sherman, director of the HealthSourceRI exchange, says part of the decreased spending is easy to handle: the state doesn't need to invest in technology as it did initially. Officials also dramatically scaled back their marketing spending, in favor of investments in customer experience improvements.

"We went from having billboards and TV spots to being much more social media-focused, much more targeted in identifying where we think the pockets of uninsured are, and getting the word out in any way possible," he said.

Sherman and other officials said initial investments in marketing, when the exchanges needed to build a brand, were important. But nearly every official interviewed acknowledged they need more ongoing outreach than expected, given the complicated nature of health insurance and the politics of the law.

"That's the real problem—the tremendous amount of misinformation that floats around," said Bruce Gilbert, executive director of the Silver State Health Insurance Exchange in Nevada, one of four other states that run an exchange but license the technology. "It's baked in, unfortunately, as political discourse has deteriorated."

California, meanwhile, remains committed to marketing—in part because officials there see bringing more people into the exchanges as a key element of achieving sustainability. Marketing remains 30 percent of its proposed 2016-2017 budget, down from 36 percent in the previous budget. California is investing more money than last year in technology and administration.

"The best investment is in ensuring ongoing growth in enrolling consumers," said Covered California Executive Director Peter Lee. "More enrollment means a better risk pool and therefore, lower costs for everyone."

Lee argued that high turnover rates make continued marketing investments essential. He said officials had hoped they could "prime the pump and then drop off" that spending—but found that isn't the case.

In Connecticut, officials are also addressing the disappearance of federal grants with a modest fee hike and a nearly 25 percent budget cut. The state is looking to expand its revenues, too, by charging other states, including Maryland, to use the technology it developed.

Several state officials said states with a broadly based user fee—one required of every plan in the state, for example, rather than just those operating in the marketplace—gave exchange administrators flexibility and allowed them to focus less on enrollment numbers. That model is in place in D.C., Maryland, Connecticut and Kentucky.

Nearly all of the officials said their optimism is based in part on experience: nearly every year, operations have run more smoothly.

"The first year was very difficult, the second year was somewhat better, and the third year was a lot better," said Lawrence Miller, chief of health care reform for Vermont Gov. Peter Shumlin. "Next year our goal is to have it looking like a pretty well-grooved operation."

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