The Exchange Sustainability Puzzle: States Begin to Put the Pieces Together

One of the major issues states are dealing with as they set up exchanges is how to ensure the exchanges’ financial sustainability after 2014. Establishment grant funds will be available through 2014 to help states stand up and operate the exchanges, but states must pay for exchange operations beginning in 2015.
States have many questions—philosophical, pragmatic, and political—as they weigh financing options.  We take a look at some key options and questions below, and we want your state’s perspective as well. What financing mechanisms is your state considering? What are some of the key questions you are trying to answer? Are there financing models we missed? Share your thoughts here.
1. Insurer Assessments
Charging assessments on all insurance carriers in the state, or on just those in the exchange, can raise operating revenue for the exchange. Such assessments may also be based on carrier revenue, percentage of premiums, or on a member-per month-basis. Some considerations for states include:

• How many carriers that fully insure plans exist in the state? Are there enough for an assessment to provide adequate revenue for the exchange?
• What are potential consequences for risk-selection and plan pricing if only carriers in the exchange are assessed?
• What other insurer assessments are already in place in the state?

Oregon’s exchange enabling legislation charges administrative fees on plans sold through the exchange. The legislation sets the fee at 3 to 5 percent of earned premium depending on enrollment.
West Virginia’s exchange enabling legislation allows the exchange board to assess fees on health carriers licensed in the state, including health carriers not participating in the exchange.
2. User Fees
User fees may be charged through transaction costs collected from consumers or from carriers that want to participate in the exchange, or collected as an aggregate fee charged to the carriers. Some considerations for states include:

• How many individuals are expected to enroll through the exchange?
• Will user fees deter individuals or plans from participating in the exchange?
• Should small businesses also pay fees?
• How will the fee affect the Minimum Loss Ratio (MLR)?

Maryland’s recently passed HB 443 allows the exchange to be financed through transaction fees, in addition to a broad-based assessment.
3. Provider Taxes
Provider taxes are a potential way to both reallocate funds currently being spent on uncompensated care and allow the entire market—even self-insured plans—to share in the financing burden, since self-insured plans may not be taxed directly. Some state considerations include:

• What provider taxes does a state currently have? How would additional taxes, or an increase, be administered?
• What type of providers will be taxed? Hospitals, physicians, or others?

According to NCSL, 46 states and DC currently have provider taxes in place.
4. Medicaid Cost Allocation
Medicaid cost allocation may also be a potential source of exchange funding. Some state exchanges may be responsible for operating the eligibility system and making Medicaid eligibility determinations in their state, and could seek reimbursement from their sister agency for this task. Some considerations for states include:

• Will the Medicaid agency, federal government, or exchange perform final eligibility determinations?
• What is the size of the state’s Medicaid population? A large Medicaid population may mean a substantial cost allocation to Medicaid.

West Virginia’s business plan lists cost allocation to Medicaid as one possible revenue source.
5. Other Revenue Sources
At the HIX Leadership Executive Education Program, a program put on by the Robert H. Smith School of Business at the University of Maryland, faculty and industry experts shared lessons from the private sector that could be applicable to exchanges. One session focused on nontraditional revenue sources, specifically indirect revenue generation via ad sales or affiliation.
Advertising generates revenue through onsite banners, links, or a search navigation bar. Websites can either sell ad space directly or outsource to an ad network. Some considerations for using advertising on exchange websites include:

• How much staff time and resources will be needed to potentially regulate content and sell ads?
• Are there rules and restrictions on permissible ads and content that state agencies or quasi-governmental agencies must follow?

Affiliations generate revenue by driving traffic to another site to help them complete a sale. Affiliates can either earn a percent of the sale or earn money for generating “leads” where consumers click over to the other site. Some considerations for exchanges thinking about becoming an affiliate include:

• What kind of related organizations or companies could the exchange partner with? What companies would value the exchange’s customer base?
• Is there any potential competition between carriers and with brokers if the exchange is an affiliate for health plans?

Exchanges will likely need to draw from a number of different revenue sources in order to be self-sustaining for the long term. What exchange financing sources is your state considering? What are some of the key questions you are trying to answer? Are there financing models we missed? Tell us in the Exchange Financing discussion or in the comments below.