Why did the Feds estimate that their insurance exchange website would cost less than that of a single state?
It is widely reported that taxpayers shelled out more than 500 million dollars to complete HealthCare.gov, the federal government health insurance website created for states that did not establish their own exchange under the Affordable Care Act (the “ACA” or ‘”Obamacare”). It is less widely reported that the Department of Health and Human Services (“HHS”) also handed out more than $4.8 billion of taxpayer money to help states establish their own exchanges such as Covered California, New York State of Health and Cover Oregon. What has not been reported is that in several states such as Oregon, the original budget to develop a single state exchange was originally estimated to cost substantially more than HealthCare.gov. How could a single state exchange cost more to build than the Federal Exchange – a nationwide exchange that would need to meet the needs and requirements for potentially numerous states?
This question became important on July 22nd when a federal appeals court panel ruled that individuals in the 36 states who acquire their insurance through HealthCare.gov are not eligible for billions of dollars in premium tax credits. Since that time, additional evidence (including the videos of Dr. Jonathan Gruber, the “architect” of Obamacare) has surfaced which further supports the argument that it was the intent of the ACA to limit premium tax credits to only state-run exchanges.
On September 30, 2011, HHS signed a contract with CGI, the primary developer of HealthCare.gov, for $55.7 million to build a complete exchange. Also in 2010, HHS began distributing detailed guidelines to states related to establishing their own exchanges and granted them hundreds of millions of dollars to start development. As revealed in my August 26th and September 8th articles, HHS guidelines specifically required state-based exchange websites to include tax credit functionality for individual enrollment (a “tax credit calculator”). However, as my articles also expose, HHS did not modify the CGI contract to require HealthCare.gov to build this same tax credit calculator until August of 2012.
As a condition to receiving these grants, states were required to “collaborate” and share technology. As my September 15th article details, states collaborated on tax credit calculator technology because of its importance and complexity. Conversely, HHS was not required and did not “collaborate” with states on a tax credit calculator. In a February 16, 2011 press release announcing $241 million in grants to “Early Innovators”, HHS stated “All Early Innovator states have committed to assuring that the technology they develop is reusable and transferable.”
Several states had also already started working with developers to start building these exchanges. One such state was Oregon and, as of September 30, 2011, HHS had already awarded it $58.1 million in grants (a $1 million state planning grant, a $48.1 million “early innovator” grant and a $9 million Level One Establishment Grant). The February HHS press release also stated that the “Grant will help Oregon create a modular, reusable IT solution that will provide the Exchange’s customers with seamless access to information, financial assistance and easy health insurance enrollment.”
We know that when the exchanges were completed the actual costs for both Cover Oregon and HealthCare.gov were significantly over budget. However, in 2011 exchange development was just ramping up and the costs had not yet gone over budget. How is it possible that in September 2011 the budget to complete HealthCare.gov was less than Cover Oregon’s budget just to start the development process? Below are six possible reasons:
Cover Oregon required greater capacity than HealthCare.gov
No – HealthCare.gov needed significantly more capacity than Cover Oregon.
- Oregon is the 27th most populous state in country with a population of approximately 3.8 million or 1.2 percent of the total population of the United States.
- According to its February 2012 Oregon Health Insurance Exchange Business Plan, Oregon projected total enrollment for individuals and small businesses in 2014 was 200,000. This amount is insignificant relative to HealthCare.gov requirements given the number of states that were considering not establishing their own exchange and the potential capacity needed for these states.
Cover Oregon planned to use more customized technology than HealthCare.gov
No – Cover Oregon grants were based almost entirely on “out-of-the-box” technology.
- On February 16, 2011 the HHS press release claimed that “Oregon is using commercially available, off-the-shelf software to create the Exchange”.
- In August 2014, Oregon filed a lawsuit against Oracle, the primary developer of Cover Oregon, related to their contract. Ellen Rosenblum, the attorney general for the State of Oregon, claimed that in response to a March 2011 questionnaire Oracle stated that it “scored more than 95% of the Department of Health Service’s requirements as a ‘4’ indicating that the ‘Oracle Solution’ was 95% ‘out-of-the-box’” and that “‘routine configuration’ could be performed by business analysts and did not require software engineers to write software code or scripts.”
Cover Oregon grants assumed completion of a larger percentage of its website than HealthCare.gov
No – The HealthCare.gov contract required completing the website while the Cover Oregon grants did not.
- The September 30, 2011 HealthCare.gov contract was to deliver a completed system – not an initial phase(s).
- HHS announced “A third funding opportunity was announced on January 20, 2011, which provides States with financial support for activities related to the establishment of exclusively State-based Exchanges. This funding opportunity provides two levels of funding based on the progress made by each State in planning for and establishing an Exchange. The first level provides one year of funding and can be limited in scope. The second level requires a more advanced state of readiness and provides funding through 2014.”
- Oregon was awarded a “first level” grant prior to September 30, 2011 with the written understanding that this would only provide funding for one year and a second level of future grants would be provided.
Cover Oregon did not intend to coordinate with other states to minimize its development costs
No – Oregon’s grants were specifically based on collaborating with numerous other states.
In a Level 2 Establishment Grant Narrative, Oregon detailed its commitment to cooperation and sharing of information with California, Colorado, Hawaii, Maryland, Massachusetts, Nevada, Utah, Vermont, Washington and West Virginia.
There was no mention of collaborating with HealthCare.gov.
When completed, Cover Oregon was required to interact with more entities in different roles than HealthCare.gov
No – Healthcare.gov was required to interact when completed with more entities in different roles.
As the following excerpts from the September 30, 2011 contract illustrate, Healthcare.gov needed to interact with a significant number of entities – all with different issues, structures and levels of development.
- “The Federal Exchange must be sufficiently robust to provide support of state exchange requirements at any point in the life cycle. In addition, the Federal Exchangemust be capable of integration with a variety of state (and federal) boundary systems and processes.”
- “The optimal outcome of the Affordable Care Act is every state and territory operating their own exchange to serve the needs of their individuals and employers; however, Center for Medicaid and Medicare Services (“CMS”) anticipates that a number of states will need local support. In some cases this support will be limited to oversight and minimal consulting to help facilitate or expedite work in progress.”
- “Some States have expressed a preference for a flexible State Partnership Model combining State designed and operated business functions with Federally designed and operated business functions . . . CMS is pursuing an approach that will be flexible to accommodate any of these options available to States.”
Cover Oregon required greater functionality
This time the answer is YES. Cover Oregon and all state-based exchanges were required to have greater functionality than HealthCare.gov – a tax credit calculator.
My August 26th, September 8th and September 15th articles made the following points.
- State-Operated Exchange website developer contracts included this required tax credit functionality for individual enrollment as outlined by HHS.
- Originally, HHS was confident that most states would establish their own exchanges.
- The original 2010 Federal Exchange contract didn’t include any tax credit functionality related to individual enrollment.
- Despite Administration pressure, and contrary to what HHS had anticipated, numerous states did not establish their own exchanges.
- In May 2012, the IRS published its final rules, which made tax credits available nationwide.
- On August 28, 2012, HHS modified the HealthCare.gov contract.
- In 2014, a GAO report attributed the contract changes to increased system requirements resulting from “finalized regulations”.
This raises the question – in 2011, why didn’t the original HealthCare.gov contract include the funds or the functionality to develop this difficult, critical and costly tax credit calculator for the federal exchange website? Perhaps because HHS knew that under the law only state-based exchanges were entitled to premium tax credits.
In the less than two months since the federal appeals court panel decision, the Obama administration’s claim that Obamacare always intended to include premium tax credits for the Federal exchange has been dismantled. Now, Obamacare appears it may be headed back to the Supreme Court, where even more damaging material could emerge. Whatever the outcome, HHS’ own documents and actions suggest that the language in the ACA stating only state-based exchanges are eligible for tax credits is no “typo.”
Oblimination – hoping for change and the reversal of Obama’s failed policies.
Scot K. Vorse is a retired investment banker having spent much of his career at Goldman, Sachs & Co. and is a graduate of Harvard Business School. Mr. Vorse is currently the President of Vorsetrade, a software company based on patent pending technology which uses barter logic and technology used by government entities to reallocate excess assets.