You Built an Exchange, Now Die In It

Mytheos Holt Policy Analyst
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Now that SCOTUScare has officially absolved any state of the responsibility of setting up their own Obamacare exchange, with all responsibility being picked up by the Feds, you have to wonder why any state would bother setting up an exchange.

Unfortunately, there may be a depressingly simple answer: To get back money they never spent in the first place when the exchanges fail.

No, that’s not a crazy hypothetical. It’s already happened in Maryland. The Washington Post reports:

The prime contractor hired to build Maryland’s flawed online health exchange will pay $45 million to the state and federal governments to avoid a lawsuit over its performance, Attorney General Brian Frosh announced Tuesday.

Maryland’s health exchange drew national attention last year when the Web site crashed moments after launching. It was plagued by glitches for months afterward.

Noridian Healthcare Solutions agreed to pay $20 million upfront and an additional $25 million in annual installments of $5 million over five years, Frosh’s office said. The payments represent 61 percent of the total paid to the company, based in Fargo, N.D., for the development and launch of the Web site.

“This settlement sends a message that the performance was unacceptable, and that those responsible will be held accountable,” Frosh (D) said in a statement Tuesday. Frosh’s office said the agreement, which is subject to regulatory approvals, will lead to the recovery of funds for Maryland and the federal Centers for Medicare and Medicaid Services, which provided significant funding for the exchange.

To conservatives, this might seem like good news. But before you start cheering on behalf of taxpayers, you might want to wonder whether Maryland’s state government actually spent anything to build their own exchange. After all, the Federal Government shelled out $5 billion in grants to the 17 states that built exchanges. Even if it spent an equal amount on every state exchange, that’d come out to about $300 million per state. Maryland’s health insurance exchange, disaster though it was, cost less than half of that to build.

In other words, it’s very likely that Maryland’s previous Democratic administration got a windfall from the Federal government in order to build their exchange, likely with little to none of their own resources on the table. Yet now that there’s a private company to shake down for the exchange’s failure, the Obama administration is giving them a split of the settlement. Windfall follows windfall.

This is, of course, ridiculous, and questionably legal. It’s not clear that the Centers for Medicare and Medicaid Services (CMS) has the right to let a state take a cut of something it never spent, when it has federal taxpayer dollars to recover. Someone should probably ask President Obama’s nominee to be permanent head of CMS, Andy Slavitt, about whether that’s all above board. I would be fascinated to hear the answer.

Whatever the particular circumstances in Maryland, imagine the precedent this sets. Any state whose health insurance exchange fails is entitled to a share of the profits from a lawsuit, regardless of whether they spent money? Sure, this might not be a big cost in the case of Maryland. But what happens when a really big exchange, like California’s, crashes? What happens when the entire system of exchanges crashes, as the broken nature of Obamacare ensures it will? How do states not have an incentive to build something broken just to lap up at the feeding trough afterwards? Hey, it almost worked for Oregon!

The message the federal government should send to states that built exchanges is simple: You broke it, we bought it. If you built an Obamacare exchange with Federal money and it fails, you don’t get any of the proceeds from the cleanup. That screwup is on your head. If you can’t build the exchange, don’t build it at all.

Of course, that would run contrary to this administration’s desire to bribe states into implementing the bloated, broken mess it has the gall to call a signature legislative achievement. But soon, a new administration may come along, and we should hope they won’t be willing to throw good taxpayer money after bad, and immolate fiscal responsibility on the altar of socialized medicine.