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Regulation and Compliance > State Regulation

The little states that (mistakenly) thought they could

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(Bloomberg View) — The state of Hawaii’s insurance exchange for the Affordable Care Act seems to be a financial disaster:

The rollout of Hawaii’s health exchange was delayed and plagued with technical problems. The Connector was awarded more than $200 million in federal funds. It has used about $100 million. It signed up 9,217 individuals, plus 628 employees and dependents. To date, the Connector has raised only $40,350 in user fees, according to Nathan Hokama, the exchange’s spokesman.

The exchange was projected to have annual operating costs of $15 million, which works out to about $1,500 a person. Those costs will be lower than expected, because enrollment is lower, but presumably a significant chunk of its expenses are fixed costs, which don’t fall just because the number of users does. The legislature has allocated just $1.5 million, or $150 per user, which is a lot cheaper — but not necessarily enough to run the exchange.

Hawaii is not the only place having funding problems. My own home of Washington just slapped a 1 percent annual tax on all health insurance policies — not just those sold on the exchange — to fund ongoing operations. If it just taxed exchange policies to cover the exchange’s $28 million annual budget, Washington would have to make it a 17 percent surcharge, which one imagines might dampen enthusiasm for the product.

The exchange’s director explains that really, this is a benefit to insurers, because they’re getting a new marketplace for their products. Some insurers don’t see it that way, however; they’re apparently threatening to sue.

What do the District of Columbia and Hawaii have in common? They’re tiny, which means high costs per user, because all that overhead has to come from somewhere. Rhode Island is also having problems, and the Providence Journal is urging the government to switch to the federal exchange:

The cost differential is stunning: The state House of Representatives’ fiscal office analysis shows that at an enrollment of 70,000 (we’re at fewer than 30,000 currently), annual administrative costs per person would be $343. If the current mix of HealthSourceRI policies were issued via the federal exchange, it would cost just $186, or 46 percent less — nearly half the price.

That brings up a question I’ve been pondering: Why did the Barack Obama administration put exchanges, and particularly state-based exchanges, at the heart of the operation? Billions have now been spent setting them up, and they will cost more money to run — more than some of these states can really afford.

I understand the argument for having state-based exchanges as an option. One of the nifty things about federalism is that states can be little laboratories, finding stuff that works that other states can then copy. I also understand the political argument that this appeased moderate Democrats, who were uncomfortable with the idea of a giant federal exchange taking over such an important economic function.

But the administration went far beyond “option”: It aggressively pushed state exchanges, repeatedly extending the deadline to decide until long after it was too late for anyone, state or federal, to do a good job building one. I can understand why they’d push big states such as Texas and Florida to build exchanges. But why encourage the District of Columbia, Hawaii and Rhode Island to follow suit? Arithmetically, it was unlikely that any of them would insure enough people to become financially viable — and certainly not in the time frame called for by the law. Why not quietly point out the terrible math and suggest they go federal?

Yes, yes, I know: The federal government forgot to allocate itself development money in the draft bill, which meant that adding more states was a financial burden. But that’s not a great justification for wasting huge sums of federal and state money on exchanges that seem unlikely to ever be viable. And what were these little states thinking? The mind boggles.

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