Budget model uncertain for state health exchanges

ST. PAUL, Minn. -- The 14 states running their own health-insurance marketplaces had all startup costs footed by the federal government, but they're supposed to pay for themselves starting next year under the federal health-care reform law.

In several states, it's not clear whether it will work out that way. Projected enrollments are lower than expected, meaning the insurance surcharges designed to sustain the exchanges might not generate enough revenue in the years ahead without significant changes in the financing model.

Officials in some states are stashing away federal grant money to continue paying for operations beyond the January 2015 target date for financial self-sufficiency. Others are contemplating staffing cuts or boosting insurance surcharges.

To date, the 14 states operating their own exchanges, plus the District of Columbia, have received nearly $3.8 billion to start and operate their health insurance exchanges, according to a state-by-state tally by The Associated Press.

Several states already are considering options to stave off concerns about solvency:

* The exchange in California, which leads the nation in sign-ups, is setting aside $184 million in federal grant money to cover projected budget deficits through 2016.

* Rhode Island is asking for an extension to keep using federal grant money through the first half of next year, and lawmakers and business leaders are concerned the state has no clear plan for paying for the exchange when the money runs out.

* Minnesota, Oregon and Washington are among the states pledging to sharply cut costs to remain afloat.

* Washington is considering a higher tax on insurance companies as the state Health Benefit Exchange adjusts to a new funding reality, moving from federal grants totaling almost $150 million this year to $40 million allocated by the Legislature for 2015.

More will be known about the exchanges' financial outlook after a March 31 deadline for people to sign up for insurance or face federal tax penalties, and many states expect pickups in enrollment. But some states aren't waiting.

"What I've begun to do is look at what is actually an extremely conservative, very low-level enrollment and begin to develop a budget that could be supported by that enrollment without raising fees," said Bruce Goldberg, the interim director of Cover Oregon, the exchange in that state.

Goldberg is aiming for a 20 percent spending reduction to cover Oregon's enrollment shortfall.

In Minnesota, where exchange enrollment is at 85 percent of what once was a worst-case scenario, a recent internal analysis projected an 11 percent deficit in 2015 and 13 percent in 2016 if enrollment doesn't improve.

Officials of MNsure, the state's exchange, have vowed to cut costs to avoid seeking any money from the Legislature during an election year.

"It would be a very difficult issue to address at the Legislature," said Tony Lourey, a Democratic state senator in Minnesota who sponsored the bill that created the exchange.

A state audit of California's health exchange designated the agency "high-risk" because of uncertainty about sign-ups.

While Covered California expresses confidence about its prospects, executive director Peter Lee said in December that "long-term sustainability of the organization" is its greatest vulnerability.

The 14 states and District of Columbia built their own insurance marketplaces under the health-care overhaul rather than use a federally operated system, which covers 36 states. Federal grants covered the cost of staffing and running the state exchanges, building websites and marketing to customers.

Lagging enrollment isn't the only problem. Many states face potentially expensive fixes to glitchy websites on which customers choose policies.

One study suggested that Minnesota's might have to be rebuilt from the ground up. California's exchange is greatly expanding its staff, hiring an additional 350 employees at its call centers in large part because of bottlenecks and long wait times.

As those problems persist, some consumers are buying policies through private companies, depriving the exchanges of revenue.

Anticipating financial shortfalls, some state exchange officials are looking at slashing everything from staffing to advertising budgets. Minnesota exchange officials also have considered selling ads on the MNsure website.

In Washington, private enrollment is about 40,000 people behind projected levels. Exchange spokesman Michael Marchand acknowledged dramatic spending cuts are likely.

Insurance companies also could be tapped for more revenue. Washington state has budgeted $40 million to run its exchange in 2015 -- funded with a 2 percent tax on its insurance sales. The Legislature has authorized charging insurance companies additional fees if necessary. Insurance companies are likely to push back, and consumers would likely feel the impact of any hike. Higher premium prices also could drive people away from the exchanges.

"Any time you come back to the insurers, that is just going to add to the cost of health care coverage," said Eileen Smith, spokeswoman for the Minnesota Council on Health Plans, which represents the state's five largest commercial health insurers.

In Rhode Island, state officials are assuming they will be allowed to continue using their federal grant money through the first half of 2015, but there is no set financial plan after that point. HealthSource RI estimates its annual operating costs at between $18 million and $24 million.

A spokesman for Gordon Fox, speaker of the Rhode Island House, said members of a legislative finance committee have been raising concerns about the "structure and sustainability" of the marketplace since last year. Business groups are concerned that finding ways to pay for the exchange could extend beyond its users.

"Every time we try to determine how is this going to be funded, there really is no answer," said Donald Nokes, a small-business owner who is board president for the Rhode Island Business Group on Health and a former vice chairman of HealthSource RI's board. "We're concerned that they may start to float the idea that this is such a valuable thing, let's everybody pay for it."

The federal government's position on new grant requests is unclear, although the federal health care law expects exchanges to be self-sufficient.

"We are working closely with states to support their efforts to successfully implement their marketplace," said Alicia Hartinger, a spokeswoman for the federal Centers for Medicare and Medicaid Services.

The agency would not clarify whether federal money might be available.

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The following Associated Press writers contributed to this report: Michael R. Blood in Los Angeles; David Caruso in New York; Sandra Chereb in Carson City, Nev.; Jonathan J. Cooper in Salem, Ore.; Donna Blankinship in Seattle; Erika Niedowski in Providence, R.I.; Ben Nuckols in Washington, D.C.; Brian Witte in Annapolis, Md.; and Kristen Wyatt in Denver.