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States Face Harsh Realities of Obamacare


For the 17 states that set up their own state exchanges under Obamacare, finding ways to manage a couple aspects of the new law are turning 2015 into a “Year of Harsh Realities.” Tom Norton explains why.

For the 17 states that set up their own state exchanges under Obamacare, finding ways to manage a couple aspects of the new law are turning 2015 into a “Year of Harsh Realities.” Tom Norton explains why.

Good Bye Federal Support for State Exchange Operations

•   On January 1, 2015 all 17 states that are running their own exchanges were required to be “self-sustaining” (ACA Section 1311(d)(5)). That is, paying for their own operating costs. Right now, many are having serious trouble achieving that goal.

Specialty Drugs “Busting the Medicaid Bank”

•   Secondly, with new, expensive specialty drugs being approved at a rapid rate, many of the same 17 states - that also expanded their Medicaid programs under Obamacare - are finding their Medicaid drug budgets are being “busted” by these new Rx drugs.

Together, these two issues are presenting substantial financial challenges for all 17 of the state exchanges. It’s panning out like this in 2015 for several of these states…  

State Exchanges and Federal Support

When the Obamacare law came on line in 2010, it was understood that the federal government would provide substantial “operational support” (An estimated total of $5 billion for all the states that decided to proceed with the creation of an Obamacare State Exchange. 

However, the law was also very clear that there would be a definite endpoint for this operational support on January 1, 2015.

Between the time of the law’s passage and the cutoff date, the states were directed by the federal government to not only get their new exchanges up and running, but also figure out how to pay for self-sustaining “operations” in each program.

In the law itself, only one specific suggestion is made as to how this might be achieved:

"Allowing the Exchange to charge assessments or user fees to participating health insurance issuers, or to otherwise generate funding, to support its operations”

As it’s turning out, that is one approach that the states are using. However, legislators have quickly learned that any proposal for the creation of an insurance “fee” to support the Obamacare state exchanges is quickly being “spun” politically as a tax increase.

Take Minnesota, an early adopter of the Obamacare state exchange concept. The operational “shortfall” in MN due to the January 1st cut off of federal state exchange support came to approximately $11.7 million for 2015. So MN “made up” the difference by raising the “premium tax” on all insurance plans sold through the state exchange. The hike?  From 1.5% to 3.5%, the maximum allowed under state law.

However, this action quickly became political as Minnesota health insurers pushed back “on behalf of patients”. The insurers’ claim? Tax increases have recently boosted the state’s insurance premiums by a total of approximately 12%. Said a representative of the MN Council of Health Plans, “At a time when we're trying to make health insurance more affordable (for patients), these actions makes it less affordable.”

Beyond the “user fee” solution, what’s become apparent this year is that finding other ways to run state exchange operations isn’t easy -- and certainly isn’t cheap. Consider this: All the state exchanges need robust websites to create and service their programs; all need expensive marketing campaigns that they must institute every year to maintain membership and expand it; and all must cover everything else from rent, to insurance, to utilities, etc., to keep their state exchange programs running. 

What the state exchanges gradually realized in 2015 is that increasingly, they must turn to their state legislatures to make up for the lost federal “operational” grants. And that is turning out to be a “solution” fraught with difficulty.

For example in Hawaii, that state’s exchange sought $28 million in state backed debt to cover the exchange’s expected operating debt until at least 2022.  The Hawaii legislature refused to go along with that deal, and instead the legislature passed a one-time supplement of $2 million to cover operating costs for this year (6th article down). Two weeks ago the Hawaiian state exchange officials stated they couldn’t make it on this amount and it is now likely that Hawaii will shut down its state exchange, effective June 30th. Hawaii’s recourse? Throw the state’s exchange program into the healthcare.gov federal default plan.

Additionally, in several of the 17 exchange states, enrollment has not met expectations. Take Washington state where the estimated sign up for 2015 was pegged about 213,000. Instead it came in at about 170,000. It boils down to simple business math: When fewer patients (customers) sign up for an offering than are expected (and needed), it means less operating money is coming in to “keep the lights on” in the Washington state exchange.

This “operating budget” situation has become so difficult, there are now reports that several states are illegally using other federal grant monies to keep their state exchange operations going. The HHS Inspector General recently launched an investigation into this possibility since such actions are forbidden under Obamacare.

So, overall, this “operations issue” is a growing problem for most of the 17 states that set up Obamacare state exchanges, and one that likely will get worse as time goes on.

State Medicaid Expansion and Specialty Drugs

One of the key aspects of the Obamacare law was the expansion of state Medicaid programs. Under Obamacare, Americans earning 133% of the federal poverty level (Approx. $32,200 for a family of four) qualify for Medicaid coverage under Obamacare in those states that have accepted this expansion. 

Interestingly, statistics show us that a large portion of the general Obamacare expansion is coming from these enhanced state Medicaid programs…In fact, one report concluded that for first half of 2014, 71% of the overall Obamacare health insurance expansion was achieved through these enhanced state Medicaid plans.

All well and good, except that one of the surprises that Obamacare’s Medicaid expansion has visited on those participating states is that a number of new, very effective, extremely expensive “specialty drugs” have appeared on the market just as millions of newly insured Obamacare patients are entering Medicaid. In several states, the Rx demands of these new patients, particularly for these specialty drugs, is threatening to “bust” their state Medicaid Rx budgets.

Take California as a prime example. An article in the Sacramento Bee noted earlier this year that as a direct result of the state’s Obamacare Medicaid expansion, California’s MediCal program has had to add a new supplemental line of $300,000,000 to its budget for 2014-16. This new sum was added to deal with the huge numbers of new Medicaid patients demanding one new specialty drug - Sovaldi - which treats hepatitis C.

The article points out that this financial supplement to California’s Medicaid drug line, by itself, is costing Californians as much as the state plans on paying for either its state parks system, or on emergency relief for the state’s severe drought. Needless to say, Obamacare’s MediCal Rx impact has become controversial in many parts of California.

In another Medicaid expansion state, Illinois, the specialty drug Sovaldi is threatening to blow a huge hole in the broader state budget with that one Rx product consuming an estimated 9% of the state’s newly expanded Obamacare Medicaid budget. 

And finally in New York, one of the first states to join the new Obamacare Medicaid expansion, and one of the states with the highest Hep C rates in the country, the double whammy of the Medicaid expansion and the arrival of specialty drugs Sovaldi and Harvoni have thrown that state’s huge Medicaid program into fiscal disarray.

Consider this -For 2014, it was estimated that if NY Medicaid were to provide those two specialty drugs at retail cost to all of New York Medicaid’s eligible Hep C patients, it would cost the state over $10 billion. Considering that the entire budget for New York Medicaid is about $55 billion annually, it is easy to understand New York State’s financial unease.

Longer term, what’s more concerning for these specialty drugs and the expanded Medicaid programs is a recent report from PricewaterhouseCoopers that found the “specialty drug category” is expected to increase by 360% between 2012 and 2020. Within that timeframe, PWC estimates that nationwide, Medicaid will spend more on these new drugs than for all non-specialty Rx pharmaceuticals.

How will this impact those states with expanded Medicaid programs under Obamacare? Well, consider this statement from an article in Modern Healthcare:

“Medicaid was the largest driver of retail prescription spending growth in 2014…The number of prescriptions filled through the program rose by 17% in 2014, accounting for 70% of the overall growth in demand for medications.”

So, as the Obamacare expanded state Medicaid programs continue to ramp up, is there any reason to believe the impact of the specialty drugs on these enhance Medicaid programs will diminish? No, absolutely not.


For most of us who have studied Obamacare since its inception, it has been very clear from the beginning that as the initial federal subsidies to the states are steadily reduced or withdrawn, the entities that are going to end up shouldering huge administrative responsibilities and substantial costs for the new Obamacare programming - will be the individual states.

Now, five years out from the implementation of the new law, it’s gradually becoming apparent that indeed, when faced with Obamacare issues - like the “operating overhead” needed to keep the independent state exchanges functioning - or dealing with medical innovation surprises like the new specialty drugs that are dramatically impacting Medicaid budgets - the harsh reality of “Who will end up paying?” leads right back to the states.

So are the states ready to manage this Obamacare reality?  That is yet to be fully determined. However, it’s fair to say given what is happening in 2015 that the early indicators are not hopeful.

Tom Norton, NHD Smart Communications of Illinois, Inc.                                                                              

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