Insurance Exchange Budgets: How Much is Needed?

Picture 12 It’s coming up to four months since the Department of Health and Human Services awarded more than $50 million in grants to states and US possessions for health insurance exchange planning and development, and the money is now starting to be spent. $50 million seems like a fair amount of cash, but it’s generally understood that this is just a down payment on the cost of exchanges. So how much might a state expect to spend?

Although neither complies exactly with the requirements of PPACA, the exchanges in Massachusetts and Utah provide some clues as to how much a state might have to spend in order to have a successful functioning exchange.

The Massachusetts Connector meets the PPACA requirements quite closely (not surprisingly given that PPACA drafters used it as a model), and has been operational for four years. It offers on-line enrollment to small groups and to both subsidized and unsubsidized individuals. There are now approximately 155,000 subsidized CommCare enrollees and close to 40,000 unsubsidized enrollees.

The Connector has been quite generously funded. An initial state appropriation provided $25 million in planning and development funds, while operations costs are funded through per-enrollee levies on participating health plans. Current levy rates are 4-4.5 percent (comparable to insurance broker renewal rates), giving the Connector an operations and ongoing enhancement budget of more than $40 million a year to pay for some 45 staff, consultants, and IT and other contractors.

After four years, Connector operations appear to be running smoothly. With an increase in enrollment in 2010 from 24,000 to approximately 40,000, the unsubsidized CommChoice program is finally growing, implying public acceptance of on-line health plan comparison and enrollment. However, even with the 2010 growth, CommChoice has only a 5 percent share of the state’s individual and small group market.

The Utah Health Exchange provides an extreme comparison to the Connector. Currently, the Exchange assists only small groups offering defined contribution coverage. The Exchange does not allow enrollment by individuals and no subsidized program comparable to Massachusetts’ CommCare is offered. After a limited pilot in 2009 which attracted very few enrollees, the Exchange was reopened in Fall 2010, but as of late December, with coverage scheduled to start on January 1, 2011, just 43 of the State’s estimated 50,000 small businesses had signed up and been determined eligible.

Funding and staffing for the Utah Exchange have been limited. In each of 2009 and 2010 the operating budget was less than $750,000, with just two full-time staff plus contractors.

Perhaps because of its very limited funding, the Utah Exchange has fallen far short of its goals. Not only has it failed to attract enrollees, it has also suffered from staff turnover, with three executive directors in the past seven months. Assuming continued limits on staff and funding, it seems unlikely to achieve success in its present form.

What does the experience of these two exchanges mean for other states? Spend like Utah, you may have a fiasco, spend like Massachusetts, you may soon be broke? Certainly, Utah’s failures indicate that lack of adequate funding may be fatal, while Massachusetts has been much more successful—with vastly greater funding—but, even after four years, has barely penetrated the unsubsidized market.

Clearly, Utah’s problems and its significant differences from PPACA requirements make it a poor model for estimating budgets for other states. Massachusetts, however, does provide a useful starting point.

As a pioneer, Massachusetts inevitably incurred high development costs (and some implementation problems). However, since the Connector has continued to enhance its systems, even the $25 million initial appropriation does not represent all development costs. The true costs of development may be closer to $40-50 million, even if just a small part of the annual budget has been devoted to such efforts. Other states should expect to spend considerably less since they should be able to build on Massachusetts’ experience, although they will face one larger challenge: their systems must be able to support all types of enrollees (small businesses, subsidized individuals and unsubsidized individuals) at initial implementation, rather being able to stagger them, as Massachusetts did.

Massachusetts costs are high also because of the Connector’s activist approach, including determining what coverage should be offered and negotiating rates for its subsidized program. Other states—particularly smaller ones with fewer potential enrollees—may prefer to take Utah’s approach of simply offering plans already available from participating insurers. However, since most enrollees in the PPACA exchanges are expected to be subsidized, all state exchanges will face costs of interfaces not only with their own Medicaid and CHIP agencies, but also with federal agencies—an even more complex data structure than in Massachusetts today.

States larger than Massachusetts may wish to take the same kind of activist role in trying to control health care costs, and accept the high development and operations costs, anticipating that their larger populations will result in per enrollee costs considerably lower than the Connector’s. Small states may balk at this approach, finding development costs of the order of $10-20 million hard to justify if exchange enrollment will only be in the 25,000-100,000 range, and hoping to at least halve this number with by providing little more than a gateway to insurers’ own sites.

Overall, it seems that states are going to experience sticker shock, right at a point at which Congressional Republicans are threatening to stop new federal appropriations to support health care reform, and the majority of states are facing their own budget crises.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  He is editor of Health Care REFORM UPDATE.

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3 replies »

  1. The opposite of “to enrich a few illicitly” is, of course, “to deprive many legally.”

  2. The cost of the Connector is small potatoes if it works, and will cost too much in money and lost time if it doesn’t, no matter how “cheap” it is.
    As for small states, does the legislation allow them to create multi-state exchanges?
    And doc99, it doesn’t sound like a mob scam. It sounds like an attempt to employ basic economic principles through the structural use of information and incentives to realign markets. It may end up badly executed, and institutional forces may end up undermining it, but the basic idea is far from an attempt to enrich a few illicitly. The opposite, in fact.

  3. Our Grandchildren shouldn’t be forced to pay the bill for this generation’s largesse. “The Connector” sounds like a Mob Scam.