The Costs of Creating a “Federally Facilitated Market”

Market failure is often cited as a justification for policy intervention. However, one always faces the possibility that the costs of government failure may be greater than the costs of market failure. In the end, there must be a weighing of the costs and the benefits of policy. We witnessed a great example of government failure in the rollout of the Affordable Care Act, as the Obama administration responded to failures in the health care market by trying to create a “federally facilitated marketplace” (FFM). Yes, that is the term and, yes, it has an acronym.

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Today the Government Accountability Office released its report on Healthcare.gov (available here). As you might guess, the development of the website and supporting systems for the FFM were not cheap:

As of March 2014, CMS [Centers for Medicare & Medicaid Services] reported obligating $840 million for the development of Healthcare.gov and its supporting systems, over 88 percent of the federal total [$946 million].

The $150 million in cost overruns and the poor performance more generally stemmed, in part, from administrative problems in overseeing the development of a high complex system:

CMS undertook the development of Healthcare.gov and its related systems without effective planning or oversight practices, despite facing a number of challenges that increased both the level of risk and the need for oversight….CMS incurred significant cost increases, schedule slips, and delayed system functionality for the FFM and data hub systems due primarily to changing requirements that were exacerbated by oversight gaps. From September 2011 to February 2014, FFM obligations increased from $56 million to more than $209 million. Similarly, data hub obligations increased from $30 million to nearly $85 million. Because of unclear guidance and inconsistent oversight, there was confusion about who had the authority to approve contractor requests to expend funds for additional work. New requirements and changing CMS decisions also led to delays and wasted contractor efforts. Moreover, CMS delayed key governance reviews, moving an assessment of FFM readiness from March to September 2013—just weeks before the launch—and did not receive required approvals. As a result, CMS launched Healthcare.gov without verification that it met performance requirements.

The GAO report was prepared for a House Energy and Commerce Committee hearing on July 30th. According to the National Journal, “Rep. Fred Upton, the chairman of the Energy and Commerce Committee, noted that key pieces of the HealthCare.gov system—including the part that pays insurance companies—still haven’t been built.”

One can only guess that the final bill will greatly exceed anything anyone would have anticipated. And these are simply the costs of setting up the ACA Rube Goldberg machine. We have yet to see if it will work.

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