After years of help from the federal government to set up their exchanges, with nearly $5 billion awarded in grants for technology, staffing, and outreach, state-based exchanges are now on their own to cover their operations costs. This year, state-based exchanges are required to be self-sufficient, but a recent report indicates that as many as half of the exchanges are underfunded and not able to cover their operations costs without dipping into their grant funding, which is not allowed. A report by the Health and Human Services inspector general last week found that many state-based exchanges may be improperly using grant funding to run the operations of their exchanges.

The funding shortfall is due to a number of reasons, including some exchanges wrestling with having to rebuild their technology after rocky launches, to low enrollment numbers causing the corresponding fees to fall short of projections. Growth in enrollment in state exchanges was far below the federal marketplace this past year, with just a 12% increase in enrollment from last year compared to a 61% increase for states using Healthcare.gov. Washington State’s enrollment numbers are less than 80% of projections, with an estimated 213,000 expected to sign-up but only 170,000 doing so. Minnesota similarly has revised its projections for future years with 130,000 expected to sign up in 2017, down from 152,000 previously projected. States with smaller populations are among the hardest hit as they have to spread these costs among fewer people yet operate similarly robust operations. For instance, Vermont’s costs are expected to reach $51.8 million this year with only about 32,000 enrollees.

Without the federal government’s help, states are left to the legislatures for financial assistance to cover the costs. Not wanting to dip into already cash-strapped state budgets, the likely source of the needed revenue is coming from insurers who are expected to contribute more funding to the exchanges, which ultimately is coming from the consumers. NAHU strongly encourages states to broaden the base of funding as much as possible to lessen the impact on consumers and help create stability within the marketplace. Unlike the federal marketplace, which has opted to automatically assess a 3.5% user fee on all policies sold through the exchanges, state marketplaces have more flexibility in charging consumers both inside and outside of the exchange, charging carriers and providers, or selling their technology and services to other states to help raise revenue.

The big issue in the back of everyone’s minds is the pending decision in King v. Burwell, which could nullify subsidies in federal marketplace states. States with struggling state-based exchanges that otherwise may have considered transitioning to Healthcare.gov may have to think again should those subsidies disappear. Transitioning to the federal marketplace also comes at a cost, estimated at $10 million to make it compatible. Meanwhile, states currently using the federal marketplace but trying to transition to their own exchange may find it difficult to convince legislatures to do so, with so many examples of poorly run exchanges dragging on state budgets. The other hurdle will be the initial set-up costs for new state-based exchanges, as grant funding expired last year, meaning that any state hoping to transition from the federal marketplace to their own exchange will need considerable funding to set-up in addition to the operating funds which are increasingly murky.