An uncertain future due to an expected U.S. Supreme Court review of health reform hasn’t stopped the administration from giving nearly half a billion dollars in U.S. taxpayer money to states to enact a key part of the new law.

However, nearly half the states, 23 so far, have not established health insurance exchanges as mandated under health reform, and may blow past their federal deadlines to enact them. Reform experts caution that the states could spoil a smooth, timely roll-out of health reform.

But more important is the unlimited amount of federal taxpayer money that could be wasted on launching these state exchanges, which on the state level already have a dismal track record of failure.

California’s own exchange collapsed in 2006 after private insurers offered cheaper, better plans, luring healthy consumers away and leaving the sickest behind, causing costs to soar. However, the federal government could spend even more taxpayer money to make sure these exchanges survive, or on Medicaid if they don’t. We’ve been warning you about rising taxpayer costs for health reform. (See here, here and here.)

To date, 15 states have established state health insurance exchanges. Eight others either plan to establish or have pending legislation to do so—23 states are still studying their options, says the Kaiser Family Foundation.

Four states have rejected them outright, with Kansas and Oklahoma sending back to taxpayers about $90 million in federal grant money.

The state exchanges are government-run marketplaces meant to offer a one-stop-shop for Americans to buy affordable health insurance. Health reform is expected to add an estimated 16 million of the uninsured into the new state health exchanges, with another 16 million of the uninsured into Medicaid. The rest would be covered by businesses—if they have more than 50 workers, they must offer coverage, or face new government fines.

The state exchanges must be federally certified by January 2013, operational by 2014 and self-sustaining by 2015. The federal government will offer federal income-based tax credits to help pay for their premiums.

With the first deadline a little over a year away, the 23 states could still muster up an exchange.
But if they blow any of these deadlines, the federal government could step in at any point to start building the exchange for them, using taxpayer money. To get them started, the government to date has sent the states $475 million in federal funds, the Administration says. Under the law, even more money is on the way.

Part of the problem is, Republican governors are wary about supporting the President’s health care reform, with a number of them joining in constitutional challenges to the law--even though a number of GOP officials have supported them, including Minnesota Republican governor Tim Pawlenty.

But many states are hitting delays because they are not getting answers to their numerous, complex questions about what qualifies as basic, affordable health coverage in the exchanges under the new law.

And that is key information they’ll also need to figure out how much federal taxpayers will have to pay to subsidize these new virtual marketplaces.

Even if the U.S. Supreme Court strikes down only the reform’s insurance mandate—which says every American must buy insurance or pay a government fine—and upholds the rest of the law, federal taxpayers may still have to subsidize these exchanges.

Two appeals courts have upheld the health reform law to date, one has ruled against it, and another ruled it could not address the mandate’s constitutionality until the mandate goes into effect in 2014.

The mandate would compel citizens to participate in commerce, despite the federal government’s circumscribed constitutional powers here. Dissenting appeals court opinions warn if the mandate stands, the federal government could also compel citizens to buy, say, accounts for retirement, college savings, or insurance for disasters, disability, even life insurance.

But without the insurance mandate, state exchanges will be even more costly to federal taxpayers, because it’s likely only the sickest would join, while the healthy uninsured could sit on the sidelines waiting to buy health insurance.

Because there would be no cudgel of a government fine forcing the healthy to buy insurance.
Also, the government fine may be too feeble--$695 a year or 2.5% of household income, whichever is greater, to persuade people to buy insurance at an annual cost of $20,000 for a family of four, estimates the Congressional Budget Office.

Section 1311 of the health reform law technically lets the federal government give unlimited sums of taxpayer money to the states to launch these exchanges. The Congressional Budget Office estimates the grants could total $1.9 billion—but that sum could grow.

The White House and Health and Human Services Dept. did not return repeated requests for comment on whether the federal government can give unlimited sums of money to the states to enact exchanges.

Also, new state exchange boards will effectively get to decide how much money federal taxpayers must pony up to assure the success or failure of the exchanges.

State insurance boards, not the federal government, will be able to regulate both the exchanges, and the states will continue to regulate the private, non-exchange insurance market.

These new state oversight boards will get to decide the incentives they can give to insurers to participate in the exchanges, or not. Who gets to be on them? The law says these boards should be made up of health industry executives, including insurers, but insurance executives can’t make up a simple majority.

On top of all this, the states could effectively get to decide whether to redirect new enrollees away from the exchanges to instead Medicaid under the new law, blowing out federal taxpayer costs even more.

But a big problem is the constitutional fight over the reform bill’s insurance mandate. The Administration needs the mandate for health reform to survive.

That’s because the new mandate is supposed to help create a big, balanced pool of very high-risk, sick patients, notably those with pre-existing conditions, whose costs will then be offset by healthy, low-risk patients.

That way, the states can offer low cost health coverage that will realistically compete with the outside, private insurance market. Without the mandate, the exchanges would be loaded with only the sickest patients, and the exchange will likely collapse.

And that can trigger what’s called a death spiral. As the exchange becomes burdened with sicker, more expensive patients, insurers subsequently raise the cost of the exchange’s health insurance premiums.

Seeing the rise in premium costs, the next set of people interested in joining the exchange would walk away – causing premiums to ratchet higher yet again, and the exchanges to crumble.

Unless the federal government decides to toss more federal taxpayer money at them.

“If the Supreme Court were to deem the individual mandate unconstitutional while upholding the remainder of the law, it would be like lighting a match in a kitchen filled with oven gas – with the taxpayers footing the bill for the exploding, federally-subsidized health care costs,” says FOX News analyst James Farrell.

Even without the big stick of a new government fine, an exchange can collapse anyway in a death spiral. Which is what happened in California.

California’s Health Insurance Plan, later dubbed PacAdvantage, fell apart in 2006 after just 14 years because its insurance pool was top heavy with costly, sick patients. Private insurers offered cheaper, better plans, luring healthy consumers away.

As their health premiums soared, consumers balked, the exchange foundered and then went under. That is the same problem that could undercut the President’s health reform bill. Meantime,
Despite all this, just recently, California was one of the first states to adopt an online health-insurance exchange marketplace under the new health reform law.

Another big problem is actually getting enough people to enroll.

In order to comply with President Obama’s health reform, Nebraska says it needs to enroll anywhere from 83,000 to 100,000 state residents in its state-based health insurance exchange before the program could sustain itself by 2015, as required under the law, according to a report presented by Nebraska’s top insurance official to state lawmakers on Oct. 28.

Any number less than that, the exchange would fall apart, state officials warn—unless the federal taxpayer steps in.

 

Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007.
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.