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Obamacare Exchanges Squander Taxpayer Dollars By The Boatload

May 12, 2014

By Yevgeniy Feyman

Remember Cash for Clunkers? That program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles with better gas mileage. But because most of the vehicles garnering such rebates would have sold anyway, taxpayers ended up paying about $24,000 per additional car sale these incentives produced.[1] Obamacare appears to be in a fierce race to beat Cash for Clunkers to become the poster child for mismanagement of federal taxpayer resources:

  • In the first open enrollment period, the State of Hawaii spent nearly $25,000 in federal funds per enrollee who signed up for coverage on its Obamacare Exchange.
  • For every dollar in premiums for Exchange-provided coverage, federal taxpayers paid 94 cents in various subsidies to either enroll people or encourage them to purchase coverage on the Exchange.
  • Premiums on the Exchanges would have more than doubled in 10 states had the federal amounts used to set up the Exchanges been incorporated into premiums rather than paid separately by taxpayers.

In reality, there was substantial variation across states on these various metrics. Here's what we found:

How Much Did Federal Taxpayers Spend per Exchange Enrollee?

We calculated a federal cost per enrollee consisting of a) the total amount paid to states in grants to set up and run Exchanges (including the federal dollars used to bankroll the federally-facilitated Exchange for the 29 states using it in 2014[2]); b) premium subsidies used to encourage people to buy Exchange coverage; and c) the estimated amount of cost-sharing subsidies that will be available to low-income families who purchase Silver plans on the Exchange. Nationally, federal taxpayers have spent $4,633 per enrollee for each of the 8+ million who have signed up for Exchange coverage through April 19. But this ranges from a low of $3,038 in Tennessee to a high of $24,947 in Hawaii.

As shown in the chart, these costs were nearly $1,000 lower per enrollee in Republican-controlled states compared to those where the governor and legislature were controlled by Democrats. Most of this difference arises from the dramatic differences in administrative costs per enrollee across states. The amount of premium and cost-sharing subsidies actually is about $300 lower in states controlled by Democrats compared to their Republican-controlled counterparts principally because many of the latter are Southern states with lower incomes and higher poverty rates than the Blue states located disproportionately in the Northeast U.S.

How Much Did Federal Taxpayers Spend per Dollar of Premiums?

There were similar large differences across states in terms of federal costs per dollar of premiums for plans offered on the Exchanges. The national average was $0.94. This figure does not mean that 94% of premium costs were subsidized by Uncle Sam. Remember that we include in federal costs not only premium and cost-sharing subsidies, but also the amounts paid by federal taxpayers for the costs of running the Exchanges; only a small portion of the latter is implicitly included in premiums.[3]

There was a 10-fold difference in this metric between the lowest state (Arizona: 63 cents per dollar) and the highest state ($6.38 per dollar in Hawaii). This ratio was slightly higher in Democrat-controlled states ($0.98) than Republican-controlled states ($0.88), but was highest of all in states run by Republican governors facing opposition legislatures ($1.27). We cannot offer a compelling political science explanation for this pattern. What we do know is that most of the difference comes from administrative costs rather than premium or cost-sharing subsidies. So we conclude by focusing on such administrative expenditures.

How Did Federal Administrative Costs for the Exchanges Compare to Premiums?

Nationally, the amount paid by federal taxpayers to set up and operate Exchanges amounted to 19 cents per every premium dollar. Again, this does not mean federally-financed Exchange costs amounted to 19 percent of premiums paid. On federally-facilitated Exchanges, a 3.5 percent surcharge on premiums was permitted to help offset some of these costs, but in most states, the actual amount spent was well in excess of this amount. Florida (1 cent per dollar of premiums) and Texas (2 cents) had costs below the surcharge amount, but the median state, Kansas (ranked 26th) had federal costs (34 cents) nearly 10 times as large as the surcharge. And the worst-ranked state was again Hawaii, whose costs amounted to $6.11 per dollar of premiums.

Such costs were nearly 3 times as large in states controlled by Democrats (27 cents per dollar) as those controlled by Republicans (10 cents). This partially reflects another reality: administrative costs on the state-run Exchanges were more than double those on the federally-facilitated Exchanges. Since 13 of the 16 states controlled by Democrats ran their own Exchanges, the higher costs for SBM states translated into higher costs for these states. But this of course does not explain why costs were higher in states with their own Exchanges. As we'll see shortly, mismanagement appears to be at least part of the explanation. While it might be tempting for partisans to assume that states controlled by Democrats are more prone to such mismanagement, we believe a simpler explanation may be at work: the perverse incentives arising from spending other people's money.

Some readers will object that it's inappropriate to be allocating the entire amount of Exchange subsidies to enrollees in the first open enrollment period since these administrative costs will be amortized over many future enrollees. We concede the point in general, but would argue that comparisons of costs per dollar of premiums nevertheless is instructive. After all, if half of Exchange are fixed costs and half are variable in all states, then a state whose total administrative costs per dollar of premium is 5 times as large as another states also will have variable costs per dollar of premium that likewise are 5 times as large.

Of equal importance, in states that are junking their Exchanges there will be no future enrollees against which future costs can be amortized. Oregon and Massachusetts, for example, already have announced plans to completely scrap their Exchanges. This means that the extraordinary costs incurred by both states ($1.05 per dollar of premiums and $1.14 respectively) were largely wasted. Indeed, all told, federal taxpayers spent $474 million on just four Exchanges that appear destined for the junk heap: Massachusetts, Oregon, Nevada and Maryland. If other states with similarly dysfunctional exchanges (Minnesota and Hawaii) are included, the total would rise by an additional $360 million. That's $834 million spent in just a half dozen states that collectively enrolled 270,000 people—in excess of $3,000 per enrollee just to get signed up!

Oregon has elected to join the federal Exchange, a move that reportedly will cost $5 million. Nevada, meanwhile, is still trying to decide what to do.[4] Maryland is hoping to somehow fix its Exchange, possibly by incorporating features from the much more successful Connecticut Exchange.

Massachusetts: A Case Study in Inept Exchange Management

In contrast, Massachusetts appears to be preparing to throw good money after bad as it has already petitioned the federal government for an additional $121 million more in federal funding (on top of $170 million in federal funds already wasted) to pursue a dual-track strategy,. Massachusetts is trying to do both — build its site from scratch even as they also plan to move to the federal exchange as a backup. And if the state can talk federal officials into handing over another $121 million, why shouldn't they double down on a failed strategy?

It's worth pointing out that the Massachusetts example helps highlight how conservative our figures are, since we only tally costs to federal taxpayers. For example, the number used in our tabulations includes only $180 million in federal funds to pay for the Massachusetts Exchange. But the Boston Herald puts the actual cost to federal and state taxpayers (assuming the federal government accedes to another $121 million) at more than one half billion dollars in 2014. All this for an Exchange that enrolled less than 32,000 people. Even assuming Uncle Sam has the good sense to turn down the state's request for additional funding, these totals amount to nearly $14,000 per enrollee.

How could something like this possibly happen? According to the Boston Herald: “documents obtained by the Herald and interviews with project staffers in February revealed infighting among top Patrick administration officials and an obsession with building “the absolute Rolls-Royce of any health exchange” that helped doom a website plagued with delays since March 2012.” Perhaps it should surprise no one that the state that gave us the “Big Dig” should have squandered taxpayer resources as prodigiously as did Massachusetts.[5] But that doesn't explain Hawaii, Maryland and Oregon—each in its own way a “pioneer” in state health reform initiatives dating back to 1974, 1978, and 1988 respectively. Nor does it explain either Minnesota or Nevada.


Jay Angoff, a former Obama administration official who played an important role in Obamacare's rollout in its early years, has drawn 3 conclusions from his compilation of federal administrative costs per enrollee on the Obamacare Exchanges:

  • Because the federal Exchange costs so much less per-enrollee than the state Exchanges, the more states in which the federal Exchange operates, the more money taxpayers save.
  • For the same reason, state officials refusing to establish their own Exchanges appear to have unwittingly contributed to the efficient implementation of the Exchange in their states.
  • Much of the money going to state-run Exchanges has not been well-spent. HHS may therefore wish to focus not on making additional Exchange grants to states, but rather on continuing to upgrade the federal Exchange, which will continue to operate in the large majority of states, and which provides substantially greater value to taxpayers than do the state-run Exchanges.

The implication of the first bullet point is that the most efficient/least costly approach would be a single national Exchange run by Uncle Sam. We strongly disagree! Yes, there may be some small economies of scale in Exchange operations (just as there are among health insurers). But that does not mean a monopoly Exchange operator is the most efficient/least costly approach, for the same reason it would not make sense to have a single monopoly insurance provider. Competition matters and state-level innovation works best when we let let the laboratories of democracy learn from one another (as Maryland evidently is learning from Connecticut’s much more successful Exchange). It’s hard to argue with the start of the third bullet point. We’ve known for decades that the flawed matching formula used in Medicaid creates all sorts of perverse incentives for states that result in a one-way ratcheting up of costs year after year. The nearly $7.5 billion shoveled out to states for Exchange operations likewise appears to have created some pretty perverse incentives in at least some states. What appears to be uncontestable is an age-old truism about human nature that Milton Friedman warned us about decades ago: very few people spend other people’s money as carefully as they spend their own.

Original Source:



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