A $910 Million Price Tag For California Exchange: A Dark Omen of Things to Come

So far California has received $910 million in federal grants to launch its new health insurance exchange under the Affordable Care Act (“Obamacare”).

The California exchange, “Covered California,” has so far awarded a $183 million contract to Accenture to build the website, enrollment, and eligibility system and another $174 million to operate the exchange for four years.

The state will also spend $250 million on a two-year marketing campaign. By comparison California Senator Barbara Boxer spent $28 million on her 2010 statewide reelection campaign while her challenger spent another $22 million.

The most recent installment of the $910 million in federal money was a $674 million grant. The exchange’s executive director noted that was less than the $706 million he had asked for. “The feds reduced the 2014 potential payment for outreach and enrollment by about $30 million,” he said. “But we think we have enough resources on hand to do the biggest outreach that I have ever seen.”

For some additional perspective I took a look at what it cost to launch the private insurance marketing site, Esurance. That company sells not only health insurance but also things like homeowners and auto insurance across the country. When I put my zip code into their system along with my age, they offered me 87 different health plans from all the big players in my area. Now granted, the new health insurance exchanges are more complex because they have to interface with Medicaid and the IRS as well as calculate subsidies. But the order of magnitude difference in what it cost to launch esurance compared to the California exchange is pretty big.

Privately funded Esurance began its multi-product national web business in 1998 with an initial $5.5 million round of venture fund investment in 1999 and a second round of $34 million a few months later.

The start-up experience of other major web companies is also instructive. Facebook received $13.7 million to launch in 2005. eBay was founded in 1995 and received its first venture money in 1997––$6.7 million in 1997.

Even doubling these investments for inflation still leaves quite a gap.

The California Exchange officials also say they need 20,000 part time enrollers to get everybody signed up––paying them $58 for each application. Having that many people out in the market creates quality control issues particularly when these people will be handling personal information like address, birth date, and social security number. California Blue Shield, by comparison has 5,000 employees serving 3.5 million members.

New York is off to a similar start. New York has received two grants totaling $340 million again just to set up an enrollment and eligibility process.

I thought it was notable that the Obama Administration has issued grants totaling $174 million to a non-profit group––Freelancers––for the purpose of setting up a new full service health plan in New York under the Affordable Care Act’s health insurance co-op program.

So, the Obama administration thinks it costs $174 million to set up a full service health insurance company in New York (including the significant cost of premium reserves) compared to $340 million to set up just a statewide insurance exchange to do eligibility and enrollment?

As many as 17 states are going to be setting up their own health insurance exchanges under the new law and the feds have so far released $3.4 billion to the states to build them. Little Vermont has received $124 million so far, Kentucky $253 million, and Oregon $242 million, for example. I wonder what the per person cost of exchange enrollment in Vermont will be?

Single-payer health system advocates have long argued that the government can do a better job running a health insurance system for a lot less money than the private sector.

Robert Laszewski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

9 replies »

  1. Initially, before you think about this option, you have to know what knowledge entry is all about. Information entry operations embody information conversion, image and document processing, picture enhancement, catalog processing services, photo manipulation services and others.

  2. The low info and low IQ mainstream voter and citizen is in for a huge wake up.

    Those of us familiar with math and a budget seem to not be as surprised. Anyone who voted for this should be stripped of voting rights for 10 years.

  3. The ACA has the best subsidies that have ever existed for working age adults who do not have employer coverage……….

    why do we need even one employee to help people sign up vs. 20,000?

    Sounds like a WPA without shovels, but let’s be honest and fund it from general revenues.

  4. I’m disappointed that no one took the author to task for his misstatement of the Freelancers’ situation. His sideways allusion to “reserves” does not excuse him from the statement that these funds are grants. His own link proves that these reserves…absolutely necessary, if a credible competitor is to emerge without a decade-long wait…are loans, not grants.

    it is true that the government is expecting a substantial portion of these CoOp loans to never be repaid, when viewed nationally. However, this is due to failure of entrepreneurial-but-consumer-governed business enterprises. Surely, the Freelancers’ plan is to not fail.

  5. To get the real picture, track down how many palms are being crossed in this relationship. I have had personal experiences with entities within the state, and untold millions are expended on healthcare programs through ignorance, laziness, or what appears to be graft at multiple levels. I have also had extensive experience with healthcare technologies, and I know for a fact that much of the cost in such government funded lprograms is “fluff”. I partnered in a highly successful private healthcare technology business that had an initial cost of about $1500 in 1994; consisted of two participants – a designer and a programmer – yet interfaced with more than 50,000 pharmacies and tens of thousands of individuals and dozens of unique “insurers”. Even today, its technologies routinely blow away “the big boys”. This is not rocket scientist stuff, but when governmental entities are spending taxpayers’ money, the economic wheels roll off. Just look at how much the Feds have already spent on the healthcare “interfaces” with no success as well as the billions and projected trillions on military planes that cannot yet fly.

    When Medicare Plan D was initiated, the private insurers/providers built in almost 20 percent for administrative costs – our adm. cost for better service was less than 3% – member “signups” initially and still cost nothing, but the Feds (Bush guys, cronies, and contributors) structured the Plan D program so little, efficient folks could not participate. Fluff, fluff, fluff.

  6. “…they offered me 87 different health plans from all the big players in my area.”

    So, how about reducing our premium costs with all this “choice” and “competition? How mucha we gonna save?

  7. I have to believe that California is not a leading indicator of anything.

    Except for us in Illinois…