This past November a committee created under executive order by South Carolina Governor Nikki R. Haley recommended rejecting a state-based health insurance exchange as currently defined by the Patient Protection and Affordable Care Act.  After months of review, we determined that states have little meaningful flexibility under the Obama administration’s concept of “state-based”; that state-based exchanges will be required to assume many administrative functions now performed by the private insurance market; and most notably that the law’s primary intent is to create a new system for delivering federal insurance premium subsidies under rules governed by the U.S. Treasury and the Internal Revenue Service – a function where the state has no compelling role.

With delayed federal regulations governing exchanges, the uncertain legal and political future of the PPACA, and a “safety-valve” in the law that allows states to take over a federal exchange after 2014, we identified no early-adopter advantage for South Carolina to rush into implementing a state-based exchange.

The risk-benefit calculation. The risks of operating a state-based exchange outweigh both its expected benefits and the potential risks of allowing a federal exchange to operate in the state.  Exchanges under the PPACA are an entirely new social welfare system for administering federal subsidies to millions of new recipients.  The timelines to implement this system were unreasonable when the bill was passed, and are more so now after several months of federal delays in issuing regulations.  Process design, technology procurements, hiring and other business functions – much of it subject to federal review – normally take several years to implement at the state level. Considering these barriers, not to mention state legislative and budgeting cycles, it is unlikely that South Carolina (or most other states) could successfully meet the deadlines to begin exchange operations in the fall of 2013 as required by federal law.

Of even greater concern is the time and attention diverted from core state services – protecting public health and managing Medicaid.  In South Carolina, Medicaid is likely the only organization capable of implementing a state-based exchange.  But our time and resources are committed to improving a badly-broken Medicaid program which currently serves over a million individuals annually and may expand by over 500,000 persons under the PPACA.  Deciding where to focus can be the difference between success and failure for many organizations – public or private.  Given the choice to either devote ourselves fully to improving the health of our state’s most vulnerable and poor, or to assume marketing and back office management for the private insurance industry and deliver subsidies on behalf of the federal government, we choose the former.

A false promise of flexibility. As for arguments that implementing a state-based exchange provides more local flexibility, our analysis finds that the federal requirements are prescriptive and the state’s meaningful choices are constrained.  The law “allows” states to make decisions on matters that would remain in control of state insurance departments in any event (such as deciding to merge the small group and individual markets), or matters in which the federal and state exchanges would very likely reach the same conclusion (such as whether to permit agents and brokers to assist individuals and employers enrolling in plans through the exchange).  The recently released exchange document — which is a combination of final rule, interim rule and “wait-and-see” — brings no new state flexibility.

Regardless of the decisions a state-based exchange might make, the U.S. Department of Health and Human Services has proposed that states must file an “Exchange Blueprint” defining how its exchange will operate.  This plan must receive federal approval to be certified and re-approved before any changes are made.  While CMS indicated it would not be using an approval process based on a similar process for Medicaid state plans, they also make it clear that CMS reserves the right to reject any plan and subsequent amendments at their discretion.

There are no clear rewards for states choosing to implement a state-based exchange at this moment.  In one scenario, the law may be overturned fully or partially this summer and much of the money and work completed will be wasted.  In another scenario where the PPACA is upheld and a federal exchange is implemented, individuals essentially end up with what they would have had otherwise given the lack flexibility for states under the law. Should the federal exchange prove problematic or unpopular, however, a state can apply to take control after one year.

Committing to a state-based exchange simply because there is easy one-time federal money available is not in the state’s best interest.  The federal strategy of offering “establishment” grants is not much different than offering free razors so consumers will buy expensive blades in perpetuity.  Many state legislatures that took federal Medicaid stimulus dollars with maintenance-of-effort strings attached now wish they hadn’t.

Participating in federal initiatives when it makes sense for the state. Many individuals and organizations would like to characterize this as a political decision.  It is not.  Where federal initiatives coincide with state strategic goals, we will participate.  South Carolina is one of fifteen states that received a federal contract to better coordinate the care of persons dually eligible for Medicaid and Medicare in our state, we support our health care providers piloting innovative improvements under CMS innovation grants, and we are upgrading our eligibility systems to interface with any exchange platform.  We have also recommended facilitating the growth of privately operated exchanges, as well as a greater focus on provider transparency and care navigation to increase consumer protections and increase value where it is needed most – at the health care provider level.

Critics of states choosing not to implement state-based exchanges often forget that states are given a choice under the PPACA.  The bill authors may now wish they had not written a federal exchange option into the law – what may have been viewed as a cudgel to use against recalcitrant states has been turned back on them.  But it is increasingly clear that without significant state assistance it will be essentially impossible for any federal exchange solution to be implemented. This is a long negotiation and as states move through their legislative sessions, they should not easily give up the leverage they now have.