A health insurance exchange has been established in every state, as required by the Patient Protection and Affordable Care Act (ACA). Each exchange has two parts, a marketplace where individuals can shop for and enroll in health insurance coverage, and a small business health options program (SHOP) exchange for small employers. A state can choose to establish its own state-based exchange (SBE). If a state opts not to, or if the Department of Health and Human Services (HHS) determines that the state is not in a position to administer its own exchange, then HHS will establish and administer the exchange in the state as a federally facilitated exchange (FFE). Fourteen states and DC established SBEs in 2014, while the remaining 36 states have FFEs. There are varying levels of state involvement in FFEs. In many states with FFEs, the exchange is wholly operated and administered by HHS. To fund the establishment of exchanges, the ACA authorizes the HHS Secretary to award grants to states through 2014. Each exchange is expected to generate its own funds to sustain its operations beginning January 1, 2015. It then briefly describes the requirement for exchanges to be self-sustaining, and concludes with a discussion of the sources and amounts of funding that HHS has used and plans to use to support FFE operations. Federal Grants for Health Insurance Exchanges

Section 1311 of the ACA appropriated indefinite (i.e., unspecified) amounts for planning and establishment grants for health insurance exchanges. For each fiscal year, the HHS Secretary is to determine the total amount that will be made available to each state for exchange grants. No grants will be awarded after December 31, 2014. HHS has awarded three different types of exchange grants, which are described below. Exchange Planning Grants

Exchange planning grants were given to 49 states and DC. These grants of about $1 million each were used by states to conduct the research and planning needed to determine how their exchanges would be administered and operated. Exchange Establishment Grants

There are two levels of exchange establishment grants. Level one establishment grants provide up to one year of funding to states that have made some progress under their exchange planning grants. Level two establishment grants are designed to provide funding through December 31, 2014, to states that are farther along in the establishment of an exchange. Early Innovator Grants

On February 16, 2011, HHS announced that it was awarding seven grants to help a group of "early innovator" states design and implement the information technology (IT) infrastructure needed to operate health insurance exchanges. Six states and a consortium of New England states received a total of $249 million in early innovator grant funding. The ACA provides that an exchange may charge an assessment or user fee to participating issuers, but also allows an exchange to find other ways to generate funds to sustain its operations. The fee for an issuer is equal to the product of the billable members enrolled in the plan through an FFE and a monthly user fee rate. Federal Administrative Funding for Exchanges

CMS is incurring significant administrative costs supporting exchange operations. During the period FY2010 through FY2012, a total of $456 million was used to support exchange operations. CMS's administrative costs to support exchange operations totaled $1,545 million in FY2013. Those funds included (1) discretionary funds transferred from other HHS accounts under the Secretary's transfer authority; (2) expired discretionary funds from the Nonrecurring Expenses Fund (NEF); (3) mandatory funds from the HIRIF; and (4) mandatory funds from the Prevention and Public Health Fund (see Table 2 ).
Pursuant to the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended), a health insurance exchange has been established in each state and the District of Columbia (DC). Exchanges are marketplaces where individuals and small businesses can "shop" for health insurance coverage.
The ACA instructed each state to establish its own state-based exchange (SBE). If a state elected not to create an exchange or if the Secretary of Health and Human Services (HHS) determined a state was not prepared to operate an exchange, the law directed HHS to establish a federally facilitated exchange (FFE) in the state. Fourteen states and DC established SBEs in 2014, while the remaining 36 states have FFEs. In some states that have FFEs, the states carry out certain functions of the exchange; in other states, the exchange is wholly operated and administered by HHS.
The ACA provided an indefinite appropriation for HHS grants to states to support the planning and establishment of exchanges. For each fiscal year, the HHS Secretary is to determine the total amount that will be made available to each state for exchange grants. No grant may be awarded after January 1, 2015.
There are three different types of exchange grants. First, planning grants were awarded to 49 states and DC. These grants of about $1 million each were intended to provide resources to states to help them plan their health insurance exchanges. Second, there have been multiple rounds of exchange establishment grants. There are two levels of exchange establishment grants: level one establishment grants are awarded to states that have made some progress using their planning funds, and level two establishment grants are designed to provide funding to states that are farther along in the establishment of an exchange. Finally, HHS awarded seven early innovator grants to states (including one award to a consortium of New England states) to support the design and implementation of the information technology systems needed to operate the exchanges. To date, HHS has awarded a total of more than $4.8 billion to states and DC in planning, establishment, and early innovator grants.
Under the ACA, each exchange is expected to be self-sustaining beginning January 1, 2015. The law authorizes exchanges to generate funding to sustain their operations, including by assessing fees on participating health insurance issuers. To raise funds for each of the FFEs, beginning in 2014, HHS is assessing a monthly fee on each health insurance issuer that offers plans through an FFE.
The Centers for Medicare & Medicaid Services (CMS) is incurring significant administrative costs to support FFE operations. According to CMS, a total of $456 million was used to support exchange operations over the period FY2010-FY2012. CMS spent $1,545 million on exchange operations in FY2013 and an estimated $1,390 million in FY2014. The agency has relied on a mix of annual discretionary appropriations and funding from other sources for these expenditures. Those sources include expired discretionary funds from the Nonrecurring Expenses Fund, mandatory funding from the Health Insurance Reform Implementation Fund and the Prevention and Public Health Fund, and FFE user fees. CMS has budgeted $1.8 billion for exchange operations in FY2015. Most of that funding is projected to come from FFE user fees.