Costs for Operating the Minnesota Health Insurance Exchange

8. Estimates of the administrative costs of operating the exchange, and methods for funding these administrative costs

Regardless of whether the exchange is established as a public, public-private, or private entity (see the discussion of governance below), it is likely that one of the most efficient ways to operate the exchange would be to set up contracts with vendors that already have the infrastructure to handle financial transactions and administrative tasks associated with operating the exchange.

The start-up and ongoing operational costs of the exchange will vary depending on what other health insurance reforms are enacted. For example, if the state establishes an individual responsibility to maintain a minimum level of health insurance coverage, significant outreach will be necessary to make people aware of it and the exchange would be a logical place to assign responsibility for this public awareness campaign.

One rough guide that can be used to estimate the likely cost of operating the exchange is to compare it to the initial budget of the Massachusetts Health Insurance Connector. The Massachusetts Connector was given a startup budget of $25 million, and authority to fund ongoing expenses through an assessment on premiums of products sold through the Connector. It is important to point out that some of the Connector's expenses replace expenses that would otherwise be incurred by insurance companies - for example, insurance companies' cost of billing and collecting premiums would be lower because the exchange would aggregate premiums from employers and individuals and remit them to health plans. The Connector's expenses also include fees paid to insurance brokers that would otherwise have been paid by health plans.

In its first year, the Connector incurred $20.9 million in expenses. The experience of Minnesota's health insurance exchange, as proposed here, would likely be different than that of the Massachusetts Connector, because it would have a different set of responsibilities. Governor Pawlenty's 2008-2009 budget proposal estimated that the first-year cost of operating the exchange would be approximately $9 million, and this continues to be a reasonable estimate of the start-up cost for the basic responsibilities of the exchange as described in Section 2 of this report. Adding other responsibilities, such as administration of a subsidy program or implementation of payment reform, would require additional funding.

The initial expenses associated with establishing the exchange would need to be funded by an appropriation, but the exchange should be expected to become self-sustaining over time. Because the exchange is expected to benefit the entire market (and because of the importance of having prices be identical inside and outside of the exchange), it should be funded through an assessment on all small group and individual health insurance plans sold in Minnesota. Total premium volume in these two markets was just over $2 billion in 2006, which means that if the exchange incurs expenses of $10 million per year the assessment as a percentage of premium would be 0.5%.

9. Other topics relevant to the design and operation of the exchange if its establishment is recommended

This section of the report addresses two other topics that are relevant to the creation of a health insurance exchange and broader insurance market reform. These topics are (1) governance of the exchange, and (2) interaction with federal requirements.