In California’s Health Exchange Cuts, A Preview of Other States’ Woes?

The Supreme Court is expected to rule soon on the legality of insurance subsidies in 37 states that use the federal HealthCare.gov site. Some states have discussed creating their own exchanges in the wake of the court’s decision, but those may not be fiscally sustainable.

The Los Angeles Times reported last week that Covered California, the Golden State’s exchange, “is preparing to go on a diet,” cutting its budget 15% for the fiscal year beginning July 1 because of lower-than-expected enrollment. Earlier this month, Hawaii’s state exchange prepared plans to shut down this fall amid funding shortfalls. Hawaii’s exchange had technical problems that have impeded signups since its launch, but Covered California has had relatively few computer glitches. During the HealthCare.gov rollout problems in 2013, columnist Paul Krugman held up California as a model of efficiency:

What would happen if we unveiled a program that looked like Obamacare, in a place that looked like America, but with competent project management that produced a working website? Well, your wish is granted. Ladies and gentlemen, I give you California.

Mr. Krugman called California “an especially useful test case,” saying that “it’s huge: if a system can work for 38 million people, it can work for America as a whole.”

But that model has run into financial distress. After slashing its spending, Covered California achieved a balanced budget for next year by utilizing $100 million in federally provided start-up funds. The Department of Health and Human Services’ inspector general and at least two U.S. senators have questioned whether exchanges are using start-up funds to plug holes in their budgets—a practice prohibited by law and one the senators called a “short term fix” in a letter to the Centers for Medicare and Medicaid Services. Using federal funds may help Covered California next year—but it will leave a multi-million-dollar hole in its budget the following year, leading to another round of belt-tightening.

The spending cuts—particularly a 33% reduction to marketing and outreach next year—will have an impact. As one report noted, “With enrollment growing more slowly than expected, a big cut in marketing might result in continued difficulties reaching target markets.” In other words, a spending cut next year could result in lower-than-expected enrollment—and budget crunches—in future years. Covered California could raise the $13.95 per policy monthly fee to generate more revenue—but that would also raise premiums, potentially driving away customers.

Before the exchanges opened, some worried about a disproportionate number of sick patients driving up premiums–and driving out healthy enrollees. A related phenomenon could be happening in state-run exchanges: in which few sign-ups result in a combination of cuts to outreach programs and/or higher monthly fees, discouraging enrollment and starting another round of the spiral. It’s possible that California’s experience could be a useful test case of that proposition—and a cautionary tale for those states contemplating their own exchanges.

This post was originally published at the Wall Street Journal Think Tank blog.