Marketplace Pulse: SBM Math Is Getting Scary

The Marketplace Pulse series provides expert insights on timely policy topics related to the health insurance marketplaces. The series, authored by RWJF Senior Policy Adviser Katherine Hempstead, analyzes changes in the individual market; shifting carrier trends; nationwide insurance data; and more to help states, researchers, and policymakers better understand the pulse of the marketplace.

Co-Author of this Pulse: Zachary Sherman, managing director, ACA Marketplace Practice Group, HMA; past executive director, Pennie; past director, HealthSource RI

With multiple adverse policies directed at the Affordable Care Act (ACA) marketplaces over the next few years, financial pressure on state-based marketplaces (SBMs) will grow, with administrative costs rising while enrollment is expected to decline. The lapsing of the enhanced premium tax credits (ePTCs) in 2026 will reduce enrollment significantly, while multiple provisions of the recently passed reconciliation bill will additionally reduce membership while creating new administrative processes that will increase marketplace costs. All this may place pressure on SBMs to increase user fees, at a time when affordability is deteriorating and state budgets will be very tight. Will SBMs be able to weather the storm?

Background

SBMs arose in the early days of the ACA when states that were committed to making the marketplace a success chose to take advantage of the opportunity to create their own model. Like healthcare.gov, many SBMs experienced technical problems at the outset, but before long the technical part became fairly routine. As a result, later SBM adopters were able to establish their marketplaces with less headaches and at a lower cost than their predecessors. In fact, saving money has become a major argument for establishing an SBM, with many being able to fund their operations at a comparable or lower cost than healthcare.gov. Currently, Washington, D.C. and 22 states have established some form of SBM, with two other states in various stages of decision making. If they chose to create their own marketplace, nearly half of states would be using this model.

Figure 1: Current Marketplace Model Landscape

Why create an SBM?

The reasons a state might want to create their own marketplace are many. An important feature is flexibility. Many SBMs have chosen different time frames than healthcare.gov for open enrollment or have chosen to address special enrollment, verification, and re-enrollment processes in a different way. Another advantage is the ability to reach target populations through improved outreach and marketing—SBMs have granular data on their enrollees and potential enrollees and are theoretically more adept at reaching out to the right audiences in their state to encourage enrollment and renewal. In some states, integration with other state agencies, particularly Medicaid, has been important, and SBMs have received federal Medicaid funding for some enrollment-related activities. Many SBMs have facilitated certain state-based affordability programs providing enhanced premium and/or cost-sharing subsidies in addition to the federal PTCs.

Despite their appetite for innovation, SBMs have generally not been receptive to the third-party enrollment mechanisms healthcare.gov has embraced. This includes web-broker and insurer supported enhanced direct enrollment (EDE) and direct enrollment (DE). SBMs have argued that these technologies erode the importance of the marketplace’s role as a centralized and unbiased source of information, although it should be noted that Georgia, which recently established an SBM, has incorporated EDE.

Proponents have argued that SBMs should embrace EDE and have pointed to healthcare.gov’s use of it as a major reason for why federal marketplace enrollment growth has far outpaced enrollment growth in SBMs in recent years. But another way to explain this trend may be that SBM states have generally expanded Medicaid, have relatively low uninsurance rates, and have perhaps reached a higher share of their addressable markets. In contrast, the largest healthcare.gov gains have been in bigger states that haven't expanded Medicaid, such as Florida and Texas, where the majority of enrollment in 2024 was below 138% of the federal poverty level (FPL).¹ Additionally, the recent instances of marketplace broker fraud and improper enrollments have been attributed to EDE vulnerabilities and, as such, have not been an issue for SBMs.²

SBMs need to pay their own costs and do not receive funding from healthcare.gov. Most SBMs and healthcare.gov fund their operations via a user fee on premiums. Historically the SBM user fee has been comparable to or lower than the healthcare.gov fee, but as federal enrollment has exploded in recent years, CMS has been able to lower their fee, spreading the costs over a much larger customer volume. The healthcare.gov user fee has steadily decreased from 3.5% of premiums in 2019 to a low of 1.5% in 2025. The Biden administration increased it to 2.5% of premiums in 2026 in anticipation of declining enrollment levels due to the expiration of ePTCs.

In states where the user fee doesn’t fully fund the SBMs’ costs, they have appropriations to defray some of their costs. Marketplace fixed costs are relatively high but marginal costs are low, so as enrollment has grown rapidly in recent years, the margins of many SBMs have improved. SBM user fees currently range from 1.85-3.5% of marketplaces premiums and, like healthcare.gov, some SBMs are considering or have already decided to raise their fee if ePTCs expire. For example, Georgia Access’ user fee will increase from 3% to 3.25% in 2026 if the ePTCs are not extended.³

Some SBMs charge user fees comparable to 2019 healthcare.gov levels even if their costs are lower and use the spread to increase spending on priority initiatives. For example, Pennsylvania’s SBM Pennie charges a 3% user fee and generates enough revenue to cover their marketplace operating costs as well as the state funding for their 1332 waiver-initiated reinsurance program.

Overall, SBMs are viewed as a successful venture. States with SBMs have been pleased with the services they have provided, and a number of other states are considering creating their own. While initially a “blue state” project that signaled commitment to making the ACA a success, more recently the idea of an SBM has been embraced by some red states that have been experiencing rapid enrollment growth fueled by the ePTC and have the view that an SBM not only enables autonomy and innovation but also generates state revenue. As noted, Georgia is a recent SBM that is very focused on use of EDE. Mississippi and Oklahoma are states considering SBM adoption, and in Texas, while nothing is official, creating an SBM has been discussed for years.

Just as enthusiasm for SBMs was buoyed by the recent meteoric growth in marketplace enrollment, it is the prospect of multiple threats to that growth trajectory that is putting the SBM model in jeopardy. The pending lapse of the ePTCs at the end of the year will result in a massive decline in enrollment, with the Congressional Budget Office estimating that 4.2 million people will go uninsured as a result of that policy change alone. Features of the budget reconciliation law and the Marketplace Integrity and Affordability rule are forecasted to cause another 4 million marketplace enrollees to become uninsured. Exits from the marketplace will not be random, leaving a remaining population which is less healthy and more expensive. A recent analysis of the total impact to the ACA market found that a reduction in enrollment of 13 million, or a 57% decrease, was not out of the question. Such a decline will create a major hit to user fee revenue, which, as discussed above, is the financial backbone of SBMs.

Yet the problems do not stop there. Both the budget reconciliation bill and the program integrity rule would also complicate the process of enrollment considerably by requiring additional forms of verification. This will require SBMs to adopt more complex administrative approaches that will raise their costs. Other changes will reduce state autonomy in terms of open enrollment period timing and how to process renewals, taking away some of the flexibility that makes having an SBM attractive in the first place. However, the majority of SBM states and a handful of healthcare.gov states are pushing back against some of these changes. On July 17, 2025, 20 attorneys general and the Pennsylvania governor sued the federal government to halt provisions of the program integrity rule, asserting that “…the Final Rule’s changes are contrary to law, arbitrary and capricious, and profoundly harmful…”⁴

States on the cusp of deciding whether to create an SBM may feel at this moment they have relatively little to gain and potentially much to lose and may not choose to expose themselves to this risk, especially at a time when state funding for start-up costs may be hard to secure. Yet these headwinds also imperil existing SBMs, especially smaller ones. With state budgets projected to be very tight in future years, expecting to backfill a budget hole with state funds may be unrealistic. In the short run, SBMs may be forced to operate, even if at a loss, and some may make the difficult decision to wind down and transition to healthcare.gov, a disruptive and expensive process that would take a year or longer to complete.

As these developments unfold, SBMs around the country are engaged in scenario planning and considering their options. Those that have accumulated reserves in recent years due to rising enrollment are clearly better able to weather the storm. The right kinds of technology investments and ingenuity may help reduce the administrative costs and coverage loss associated with some of the new verification provisions. The outcome of pending litigation may also have important implications for SBM viability. Planning, prioritization, and cross-state collaboration, particularly for SBMs who share technology vendors, will be paramount to achieving efficiencies and reducing the cost of necessary system upgrades. Finding ways to collect revenue from the off-exchange market is another possibility, especially with the growing buzz around Individual Coverage Health Reimbursement Arrangements (ICHRAs).

It’s too soon to say how great the impact of these changes will be on SBM revenue and costs, but it is safe to say that SBMs are increasingly vulnerable as the marketplaces are projected to become significantly smaller and more costly to operate. For those states that value their marketplace and are willing to go long on the individual market, hunkering down for a few years may be the right call.       

1 https://www.cms.gov/data-research/statistics-trends-reports/marketplace-products/2024-marketplace-open-enrollment-period-public-use-files

2 https://kffhealthnews.org/news/article/obamacare-enrollment-plan-switching-rogue-agents-enforcement/

3 https://georgiaaccess.gov/for-partners/insurance-companies/ (Accessed July 21, 2025).

4 https://oag.ca.gov/system/files/attachments/press-docs/CMS%20Rule%20Complaint.pdf