Federal Funding for Health Insurance Exchanges
Released: 2014-10-29T00:00:00

A health insurance exchange has been established in every state, as required by the Patient Protection and Affordable Care Act (ACA). Each exchange has two parts, a marketplace where individuals can shop for and enroll in health insurance coverage, and a small business health options program (SHOP) exchange for small employers. Some individuals are eligible to receive financial assistance for their coverage obtained through an exchange, and some small employers can obtain tax credits toward coverage purchased through a SHOP. Exchanges are not intended to supplant the private market outside of exchanges, and the ACA does not require that individuals and small businesses obtain coverage through an exchange.

A state can choose to establish its own state-based exchange (SBE). If a state opts not to, or if the Department of Health and Human Services (HHS) determines that the state is not in a position to administer its own exchange, then HHS will establish and administer the exchange in the state as a federally facilitated exchange (FFE). Fourteen states and DC established SBEs in 2014, while the remaining 36 states have FFEs. There are varying levels of state involvement in FFEs. In some cases, a state has partnered with HHS to establish and administer the exchange, and in other cases HHS is administering the individual exchange while the state administers the SHOP exchange. In many states with FFEs, the exchange is wholly operated and administered by HHS.

To fund the establishment of exchanges, the ACA authorizes the HHS Secretary to award grants to states through 2014. Each exchange is expected to generate its own funds to sustain its operations beginning January 1, 2015. This report provides a state-by-state breakdown of the grants awarded to date. It then briefly describes the requirement for exchanges to be self-sustaining, and concludes with a discussion of the sources and amounts of funding that HHS has used and plans to use to support FFE operations.

Federal Grants for Health Insurance Exchanges

Section 1311 of the ACA appropriated indefinite (i.e., unspecified) amounts for planning and establishment grants for health insurance exchanges. For each fiscal year, the HHS Secretary is to determine the total amount that will be made available to each state for exchange grants. Any state that intends to do exchange establishment work can apply for and receive a Section 1311 grant; for instance, a state that is not establishing an SBE may receive a grant provided the state uses the funds for activities related to exchange establishment and implementation. States have had multiple opportunities to apply for Section 1311 grants. One deadline remains for submitting an application this year (i.e., November 14). No grants will be awarded after December 31, 2014.

HHS has awarded three different types of exchange grants, which are described below. Figure 1 shows the total amount of funding each state has received from the grants as well as the type of exchange (SBE or FFE) each state has in 2014. Table 1 shows the amount each state has received from the various types of grants.

Exchange Planning Grants

Exchange planning grants were given to 49 states and DC. These grants of about $1 million each were used by states to conduct the research and planning needed to determine how their exchanges would be administered and operated. Three states returned all (Florida and Louisiana) or a portion (New Hampshire) of their exchange planning grants.

Exchange Establishment Grants

There are two levels of exchange establishment grants. Level one establishment grants provide up to one year of funding to states that have made some progress under their exchange planning grants. States may seek additional years of level one funding in order to meet the criteria necessary to apply for level two funds. Level two establishment grants are designed to provide funding through December 31, 2014, to states that are farther along in the establishment of an exchange. States applying for level two establishment grants must meet specific eligibility criteria regarding the structure and governance of the exchange they are developing.

HHS has announced several rounds of exchange establishment grant awards, the most recent of which was on October 14, 2014. To date, 37 states and DC have received a total of approximately $4.7 billion in exchange establishment grant funding. Within that group, 14 states—California, Colorado, Connecticut, Hawaii, Kentucky, Maryland, Massachusetts, Minnesota, Nevada, New York, Oregon, Rhode Island, Vermont, and Washington—and DC have received both level one and level two funds.

Early Innovator Grants

On February 16, 2011, HHS announced that it was awarding seven grants to help a group of "early innovator" states design and implement the information technology (IT) infrastructure needed to operate health insurance exchanges. The goal is for these states to develop exchange IT models that can be adopted and implemented by other states. Six states and a consortium of New England states received a total of $249 million in early innovator grant funding. Three states—Kansas, Oklahoma, and Wisconsin—have since returned their early innovator grants.

Self-Sustaining Requirement for Health Insurance Exchanges

Beginning January 1, 2015, the ACA requires that each exchange is self-sustaining. The ACA provides that an exchange may charge an assessment or user fee to participating issuers, but also allows an exchange to find other ways to generate funds to sustain its operations.

A description of how each SBE intends to generate funding is currently beyond the scope of this report; however, HHS has described how it intends to generate funding for the 36 FFEs it administers. Beginning in 2014, HHS will charge a monthly user fee to all issuers that sell plans through an FFE. The fee for an issuer is equal to the product of the billable members enrolled in the plan through an FFE and a monthly user fee rate. For benefit years 2014 and 2015, the monthly user fee rate is 3.5% of the plan's monthly premium.

Federal Administrative Funding for Exchanges

CMS is incurring significant administrative costs supporting exchange operations. CMS operates a number of IT systems that control various FFE functions including eligibility and appeals, certification and oversight of qualified health plans, and payment and financial management. It also operates the data services hub, which routes information about exchange applicants to and from trusted data sources at other federal agencies (e.g., Internal Revenue Service) in order to verify eligibility. In addition, CMS provides consumer assistance through a call center and website for the FFEs, and it funds navigators who offer in-person support. Finally, CMS provides technical assistance to states operating SBEs.

Table 2 summarizes the sources and amounts of administrative funding for exchange operations to date. This information was included in CMS's FY2015 budget submission. During the period FY2010 through FY2012, a total of $456 million was used to support exchange operations. Of that amount, $331 million came from annual discretionary appropriations that cover the routine costs of running federal agencies, including salaries and expenses: $307 million from CMS's Program Management account, and an additional $24 million from the HHS Departmental Management account. The remaining $125 million came from the Health Insurance Reform and Implementation Fund (HIRIF), a $1 billion fund within HHS that was established and funded to help pay for the administrative costs of ACA implementation.

CMS's administrative costs to support exchange operations totaled $1,545 million in FY2013. In the FY2013 budget, CMS requested an increase of $1,001 million for its Program Management account for ACA implementation and other activities. However, Congress did not provide any additional discretionary funds for ACA implementation in FY2013. CMS instead used funds from other sources to help pay for ongoing administrative costs associated with exchange operations. Those funds included (1) discretionary funds transferred from other HHS accounts under the Secretary's transfer authority; (2) expired discretionary funds from the Nonrecurring Expenses Fund (NEF); (3) mandatory funds from the HIRIF; and (4) mandatory funds from the Prevention and Public Health Fund (see Table 2 ).

CMS estimated that its FY2014 administrative costs for exchange operations would total $1,390 million. The agency requested an increase of $1,397 million for its Program Management account in the FY2014 budget for ACA implementation and other activities. But, as in FY2013, Congress chose not to give CMS any additional funding. Once again, the agency relied on transferred departmental funds as well as NEF and HIRIF funding to help support exchange operations in FY2014. In addition, CMS projected that it would collect an estimated $200 million in FFE user fees in FY2014 (see Table 2 ).

The President's FY2015 budget includes a total of $1,788 for exchange operations. Of that amount, $629 million is from CMS's Program Management account, and the remaining $1,159 million is projected to come from FFE user fees. The FY2015 budget does not identify any other sources of funding to support exchange operations (see Table 2 ). CMS has requested an increase of $227 million for its Program Management account in FY2015 for ACA implementation and other activities.

Additional Information

The Center for Consumer Information and Insurance Oversight (CCIIO) at CMS is responsible for implementing ACA's private health insurance reforms and administering the grant programs discussed above. Detailed information on the grants, including funding opportunity announcements, guidance, news releases, and amounts awarded, is available on CCIIO's website.