Published in POLITICO
While sorting out the policy kinks in setting up a federal exchange, HHS must tackle another problem: There is no money to pay for it.
A quirk in the Affordable Care Act is that while it gives HHS the authority to create a federal exchange for states that don’t set up their own, it doesn’t actually provide any funding to do so. By contrast, the law appropriates essentially unlimited sums for helping states create their own exchanges.
The lack of funding for a federal exchange complicates what is already a difficult task. HHS will likely be operating exchanges in states like Louisiana and Florida that oppose the ACA on principle and have said they will not comply with the exchange provisions. But HHS also will likely be responsible for several other states that may want to set up exchanges, but will be unable to enact laws and set up the infrastructure under the short time frame specified by the law.
A federal exchange will have the same authority states do to impose fees on insurance sold through the exchange once it is open for business. But there is no money coming in until people start purchasing insurance, and there is a great deal of work to be done to prepare to open the doors of federal exchanges.
“It’s very clear that [the HHS] secretary should ‘use such sums as may be necessary’” for supporting states in creating their exchanges, but it’s “sort of silent” on the federal fallback exchange, said Jon Kingsdale, the founding director of the Massachusetts Connector, who is advising HHS on the creation of the federal exchange.
“What you’d have to do is probably get creative about the financing,” perhaps enticing contractors to do development for free in the expectation that they would get paid once the exchange started collecting fees, Kingsdale said.
The CCIIO will also face the challenge of paying for the functions of state exchanges, such as the infrastructure for doing risk adjustment, which it has indicated it will be willing to pick up under “partnership” arrangements with the states. HHS proposed the partnerships in draft regulations in order to create an alternative to an all-federal exchange in a state that’s unable to meet all of the requirements on time.
The general pot of money that the ACA makes available for implementation is surprisingly small, given that it is ushering in a series of new regulations covering a sector that accounts for a major chunk of the American economy. It only appropriates $1 billion for all federal administrative costs.
“Everyone expects that billion dollars not to be adequate,” said Edwin Park of the Center on Budget and Policy Priorities, which would make it necessary for HHS to find ways to draw on regular appropriations.
“You’d presume some mix of that billion dollars and regular appropriations” would provide the funding for setting up the federal exchange, he said.
HHS has distributed a quarter of the $1 billion in implementation funds, according to written answers that department Secretary Kathleen Sebelius submitted in March to questions from the House Energy and Commerce Committee. The department did not respond to a request for up-to-date numbers by deadline.
Tevi Troy, who functioned as HHS’s chief operating officer in the George W. Bush administration as the department’s deputy secretary, explained that although Congress might try to restrain Sebelius’s efforts to use funds for priorities it opposes, there are many accounting tools at her disposal.
“Money is fungible, and implementation is a priority for the administration,” Troy said.
One option is to “tap” one program’s funds to pay for another. During his time at HHS, Troy said, a meeting would be held annually to sort through the taps on various programs to make sure the administration’s priorities got funded. Another option widely cited is to “detail” employees from one program to work on another.
The decision to move CCIIO inside of CMS also makes it easier to fund the office’s work, say those familiar with HHS budgeting, because the CMS budget has fewer line items earmarking funding and it has one of the largest budgets within the department.
“CMS was often one of the big dogs” in the reallocation of resources because of its size, Troy said.
CMS did not respond to questions about funding for the federal exchange by deadline. “We continue to work with all states to establish Affordable Insurance Exchanges for all Americans and are confident that we are on track,” CMS spokesman Brian Cook said in an email. “More than half the states have taken action to date, and many others are working diligently on the approach that best suits their local needs and markets.”