Today the State Auditor’s Office (SAO) released a performance audit of the Washington Health Benefit Exchange. The main issues uncovered are that the Exchange hasn’t been fully reimbursed by Medicaid for Medicaid services and that it does not have reserves or a long-term financial plan. The audit also notes, though, that the Exchange’s operating costs “appear reasonable.”

Medicaid Reimbursement. Because clients enroll in Medicaid through the Exchange, the Exchange is supposed to be reimbursed for Medicaid services by the federal Centers for Medicare and Medicaid Services (CMS) and the state. But the audit found that full reimbursement has not been made because “the Exchange and the Health Care Authority (HCA) did not ensure the [cost-sharing] plans included all costs for Medicaid services provided by the Exchange.” The SAO estimates that “the state and the federal Medicaid program should have further reimbursed the Exchange for Medicaid services totaling $89.2 million from January 1, 2014, through June 30, 2016.” Of that, the state’s share would be “between $22.3 million and $44.6 million.”

According to the SAO,

When asked why the cost allocations were so inaccurate, Exchange officials told us former staff lacked cost allocation knowledge. They also told us Exchange and state officials wanted to minimize the financial impact on the state in its first years of operation by maximizing its use of the federal establishment grant funds, which do not require the state to match funds as Medicaid does.

Although CMS told the SAO that states may “correct reimbursement plans retroactively,” the Exchange apparently has no such plans—“doing so would require the state to contribute to past Medicaid-related costs that were subsidized by the Exchange at the time.”

The Exchange may be saving state Medicaid funds by not asking for more reimbursement, but it is shifting costs to private QHP enrollees. As the SAO writes,

When HCA does not fully reimburse the Exchange for Medicaid-related services, the Exchange must pay for these services through its carrier assessments. Insurers pass these costs on to customers through higher premiums for plans sold through the Exchange, which may also be sold off the Exchange. Purchasers of private health insurance plans across all incomes are effectively subsidizing Medicaid if HCA does not fully reimburse the Exchange.

(Emphasis added.)

Reserves. Having reserves is an important part of sustainable budgeting, but the SAO found that the Exchange does not have working or capital reserves or a long-term financial plan.

Enrollment-driven revenues at state-based exchanges are expected to be inversely related to a strengthening economy, when more people have employer-provided health insurance. When the economy is weak, fewer people have coverage, and more will need to turn to the exchange to purchase their insurance. Maintaining a working reserve of funds enables exchanges to more easily manage their sustainability during these ups and downs. Connecticut’s plans call for on-hand reserves that are sufficient to pay for nine months of operations; California plans for reserves of up to six months.

A working reserve would also help the Exchange weather delays in obtaining reimbursements from HCA for Medicaid enrollees and other unanticipated challenges. The Exchange plans to work with OFM and the Legislature to establish a reserve – not only for IT investments but also to ensure stable operations during transitional economic times.

Self-Sustainability and Accounting. The audit notes that revenue sources for the Exchange are the 2 percent premium tax (paid by insurers for plans sold on the Exchange), carrier assessments (paid by insurers offering plans on the Exchange, per member per month), Medicaid reimbursements, and federal grants. In 2016, the premium tax brought in $12.1 million, carrier assessments $8.8 million, Medicaid reimbursements $28.6 million, and federal grants $29.5 million—for a total of $79.0 million. In 2017, the total budget is $54.5 million (with no federal grant revenue).

The SAO writes, “Washington’s exchange was slower than others to focus on sustainability. Although it has a strategic plan, it lacks a long-term financial plan and has only recently started to address other aspects of sound financial management.” Further, “The high enrollment forecasts from 2012 perhaps contributed to a sense that the Exchange’s near-term finances were secure, and long-term planning was not urgently needed.”

According to the SAO, “If the Exchange is fully reimbursed for the past Medicaid services it has provided, and for the future Medicaid services it will provide, this should ensure its self-sustainability.” Additionally, “Increasing QHP enrollment would result in additional revenue and further strengthen the Exchange’s ongoing fiscal sustainability.” That is probably easier said than done, given that enrollment seems to have found its sweet spot.

Still, the SAO suggests that increased enrollment could be achieved “by improving its website, Healthplanfinder, to provide better guidance around automatic renewals and to better highlight the financial subsidies that are available to customers.” Regarding some of those subsides,

Currently, Washington ranks 41st out of 49 states in the percentage of health plan purchasers who also use a cost-sharing reduction plan. If customers better understood the income levels that qualify for assistance and the benefits of these plans, they would more likely enroll in coverage.

If I were the Exchange, I wouldn't count on this strategy. These financial subsidies may be unavailable in the future, as a federal judge has recently ruled that they are illegal.

Additionally, the audit mentions the U.S. Department of Health and Human Services inspector general's memo that questioned Washington’s use of federal grants for operating costs:

The Exchange is working to identify potential adjustments to what it has charged these grants. Once it has finalized these adjustments, the Exchange should work with CMS and the OIG to determine whether it must reimburse the federal government for any unallowable costs.

But, because the Exchange doesn’t have reserves,

. . . it may not have funds that could help it repay CMS for any identified unallowable costs. Therefore, depending on the amount, reimbursing these costs could challenge its immediate financial self-sustainability, particularly if HCA does not reimburse it for the Medicaid-related costs discussed previously.

Another interesting point from the audit is related to accounting. Apparently carrier assessments and premium taxes go into a single account, which is used by the Exchange “to pay for its QHP related operations, and to pay for some of the state’s match on the Medicaid reimbursements it receives.” As the SAO writes,

This accounting arrangement is problematic. Unlike premium taxes, which can be spent on eligibility services for both Medicaid and QHPs, the Exchange’s carrier assessments can only be spent on servicing QHPs. These assessments may only be used to pay for QHP related operations. But because the two funding sources are comingled in one account, the Exchange cannot ensure its carrier assessments are used only for their statutorily intended purpose. This accounting arrangement creates one more problem. Unless separate accounts are established, if the legislature ever decides to transfer these funds as part of a future budgeting process, it cannot distinguish the carrier assessments from the premium taxes.