Covered California Health Insurance Exchange at a Crossroads

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SACRAMENTO — As millions of Americans nervously await the U.S. Supreme Court's ruling on a key provision of the health care law — whether or not federal subsidies are legal in 34 states that don't run their own insurance exchanges — California's newly insured can breathe a bit easier.

Even if the court rules in favor of the plaintiffs trying to gut the law, imperiling the subsidies 6.3 million people are using to help pay their insurance bills, the decision should have no immediate effect on California and other states that have set up their own state-run exchanges.

"The chaos that would be created by a court ruling for the challengers doesn't spill over across state lines," said Larry Levitt, a senior vice president at the Menlo Park-based Kaiser Family Foundation.

But that doesn't mean the Golden State's exchange, called Covered California, doesn't face other significant challenges, from trying to build up its enrollment numbers, to the end of federal revenue guarantees for health insurance companies that agree to participate in the exchange — something observers say could cause premiums to spike.

Covered California has generally been considered a star among state exchanges created by the Affordable Care Act, commonly called "Obamacare." But like a kid riding his first bike, Covered California will see its training wheels start to come off next month.

That's because the $1.1 billion the exchange received in federal funds to get it up and running is almost gone. Though it will begin its new fiscal year on July 1 cushioned by the last $100 million of that grant, the exchange's operating budget will now rely solely on its chief revenue source: the $13.95 cut it gets from every enrollee's monthly premium.

After surpassing its first year goal by 400,000 — signing up 1.1 million people in private plans — Covered California's enrollment climbed to only 1.3 million this year, wildly off its 1.7 million target for 2015.

Experts are watching carefully because the financial health of the exchange depends on growing its number of enrollees. If that doesn't continue — or even backslides — shrinking dollars could threaten the way the exchange now operates.

Finally, provisions of the law designed to offset possible losses for health insurers will expire in 2017. That could also impact premiums — and enrollments — even further.

But Peter Lee, Covered California's relentlessly upbeat executive director, remains unfazed.

He attributed this year's lower-than-projected final enrollment figure to overestimating the number of people the exchange thought would be transitioning from Medi-Cal to Covered California plans. In addition, he said, as the economy recovered and more Californians got jobs, they dropped their exchange plans when they gained employer-funded health care.

But the exchange, Lee said last week during its monthly board meeting to approve a $335 million "break-even" budget, is in solid financial shape, with $200 million in reserves.

"Some of the things that set Covered California apart from other states is our scale. We're big," Lee said. "Having 1.3 million covered lives means we're collecting a lot of money on our planned premiums. We did that from the first day we opened our doors. We're putting money in the bank for ongoing operating" expenses.

And if the exchange needs to build up more reserves, he said, it can always "dial up" the $13.95 monthly fee, or cut its annual budget.

Even though the exchange missed its target enrollments, Lee's board of directors just dialed up Lee's compensation. It granted him a $65,000 bonus, on top of the 24 percent raise the board handed him in February and another 2.5 percent last week. His base salary is now $333,120 a year.

"The 44 percent of Covered California policyholders who say that they are having trouble affording their premiums might take issue with paying for Peter Lee's 25 percent raise and bonus," said Carmen Balber, executive director of Santa Monica-based Consumer Watchdog.

Consumer activists like Balber have been spooked by the high rates being proposed in other states. In Pennsylvania, for example, one HMO is reportedly asking for increases of up to 58 percent.

But Lee noted that unlike in most states, Covered California negotiates the rates with health insurers.

Beginning in 2017, federal protections for insurers — including provisions that limit insurance losses — will end. And that could drive rates up.

But Lee downplayed the impact. "Our experts do not believe the phaseout is a concern because we are now operating at a large scale with a healthy population of enrollees," he said. "Had the enrollees been disproportionately sicker than they are, this might have been a bigger issue."

But some critics say Covered California already has a problem with premiums.

"The fundamental problem is that Covered California seems to be in denial about their health insurance products just not being attractive to other than the lowest-income people," said Robert Laszewski, a nationally renowned health care policy expert.

Low-income people, he said, not only pay very low premiums because of the high subsidies, but also pay very low deductibles and co-pays. But, he said, the working class and middle class are still paying high Covered California premiums and have plans with high deductibles and co-pays.

In 2015, Covered California was able to keep average premium hikes on its health care plans to 4.2 percent. But it's not yet known if prices will surge in 2016, since those prices are now being negotiated and won't be released until later this summer.

"We do have a very, very good story to tell here in California," Lee told the exchange's board last week.

Still, he acknowledged, for many Californians, "it is a struggle to pay their rent and put food on the table. Making health care affordable has not made health care in America cheap. But we are bringing it within reach."

Contact Tracy Seipel at [email protected] or 408-920-5343 and follow her at

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