By Rea S. Hederman Jr. and Quinn Lentz

Summary

The Supreme Court’s decision in the Affordable Care Act case, King vs. Burwell, is imminent. Burwell will decide whether the federal government may continue to offer tax subsidies for health insurance plans purchased through federal health insurance “exchanges.” The issue in Burwell is especially poignant for Ohioans insured through the federal exchange, because Ohio wisely chose not to build a state-based exchange under the Affordable Care Act. If the Supreme Court determines—perhaps as soon as Thursday—that federal tax subsidies are not available under the federal exchange, Ohio’s leadership may be tempted to create a state-based exchange to fill the subsidy void. Ohio should resist this temptation.

Only 15 states have built their own state-based insurance exchanges, and several of them are already regretting it. State-based exchanges have proven to be costly, wasteful endeavors that have shown limited success and ample failure. Three straightforward examples should deter Ohio from pursuing the path to a state-based exchange. Oregon, Maryland, and Hawaii have each found their state-run exchanges to be expensive to build, difficult to execute and maintain, and an unnecessary tax burden imposed on their citizens. Indeed, two of these states have already pronounced their exchanges unworkable and will be moving—at an additional expense—to the federal exchange.

Three Failed State-Based Exchanges

Oregon’s state exchange website “Cover Oregon” cost state taxpayers $300 million and was plagued with difficulties from the beginning. The contractor tasked with building the website warned state officials of severe problems with the site more than two years before the site was launched. Those warnings were ignored. Poor leadership, mismanagement, and miscommunication within the Oregon governor’s administration only made things worse. After messy political infighting, finger pointing, and name-calling, Oregon ultimately defaulted to the federal exchange healthcare.gov for 2015 enrollment—costing Oregon’s taxpayers another $40 million.[1]

Maryland provides a second cautionary tale. The “Maryland Health Connection” website launched prematurely and was fraught with project difficulties. Three different project managers were needed to try to complete the task, making it impossible to hold anyone accountable for the project’s failures. Feuds ensued among those ostensibly in charge, and warnings that the exchange would be delayed or not ready for launch were ignored.[2] Maryland taxpayers paid $170 million for website technology that the state summarily abandoned in 2014 and replaced it with Connecticut’s technology—an overhaul that cost Maryland an additional $40 million.[3] Not surprisingly, the costly exchange fiasco played a major role in the state’s 2014 gubernatorial election.[4]

Like Oregon, Hawaii is in the throes of dismantling its state-run exchange and moving to the federal exchange for the 2016 enrollment season. Higher-than-expected operation costs and low enrollment figures appear to have doomed the state’s exchange. Hawaii spent $205 million constructing its exchange, but only enrolled approximately 8,500 people in the first year.[5] Lack of anonymous browsing capabilities may help explain such low enrollment, but technological difficulties quickly arose when the eligibility system on the site was not properly integrated with the state’s Medicaid system. Without federal funding, Hawaii’s site does not generate enough revenue to be sustainable, and state policymakers have resisted raising taxes to save the exchange. Hawaii’s planned transition to the federal exchange is estimated to cost $30 million.[6]

Costly Failures

These failures in leadership, execution, management, and sustainability are dire warnings for Ohio to resist any temptation to build its own state-based exchange. With hundreds of millions of dollars in taxpayer money lost and little to show for it, a state-run exchange is simply not worth the risk.

Consider that the average yearly health insurance premium for a 40-year-old nonsmoker in Ohio cost $4,051 in 2015.[7] That means that the annual premiums for approximately 40,000 people could be covered by the $170 million that Maryland wasted on its now-abandoned technology. Another 10,000 premiums could be covered by the state’s $40 million technology upgrade. Similarly, Hawaii’s $205 million exchange failure could have paid more than 50,000 individual insurance premiums in Ohio, and covered almost 8,000 more with the $30 million it will spend moving to the federal exchange.

Even worse, the $300 million used to build the Cover Oregon website could pay the annual insurance premium for almost 80,000 Ohioans for one year. The $40 million used to dismantle and move the exchange to the federal site could cover premiums for nearly another 10,000 people. Considering that just over 100,000 Ohioans receive subsidies from the federal health care exchange[8]—some more, some less—Ohio could almost cover the full premiums for the subsidized population in 2016 with the money that Oregon wasted.

Conclusion

If the federal government loses in King vs. Burwell, pressure will mount for Ohio to create a state-based exchange so that subsidies will continue to flow. But as the horror stories from Oregon, Maryland, and Hawaii demonstrate, state-based exchanges are unproven, unreliable money-pits that waste taxpayer dollars. Ohio prudently avoided the costly exchange debacles suffered by her sister states, saving Ohioans hundreds of millions of dollars by not building a state-based exchange program, and should not now be bullied into its own risky exchange experiment because of Congress’s drafting error.

In the wake of the Burwell decision, Governor Kasich and the General Assembly should ignore any knee-jerk clamoring for a state exchange, and instead push for viable, fiscally sound alternatives from the federal government. Congress and the Obama Administration created this potential problem through shoddy legislation, heavy-handed regulations, and a distorted market of artificially high insurance premiums. The burden should remain on Washington to fix it.

1. Grace-Marie Turner, Oregon’s Failed Obamacare Exchange Is A Warning for Other States, Forbes, March 31, 2015.

2. Aaron C. Davis and Mary Pat Flaherty, Maryland officials were warned for a year of problems with online health-insurance site, The Washington Post, January 11, 2014. 

3. Louise Norris, Maryland health insurance exchange/marketplace, HealthInsurance.org, May 1, 2015.

4. Rebecca Ballhaus, Surprise Win for GOP’s Larry Hogan in Maryland Governor Race, The Wall Street Journal, November 5, 2014.

5. Alexander Hendrie, Hawaii Obamacare Enrolls Zero People During Special Enrollment Period, Americans for Tax Reform, May 20, 2015.

6. Louise Norris, Hawaii health insurance exchange/marketplace, HealthInsurance.org, June 6, 2015.  

7. National Conference of State Legislatures, Health Insurance: Premiums and Increases, January 2015.

8. The Heritage Foundation, With or Without Subsidies: Providing Relief to Ohio, June 15, 2015.