The U.S. Department of Health and Human Services (HHS) proudly announced earlier this month that it had awarded more than $1 billion to states for planning and establishing the health insurance exchanges created under the Affordable Care Act (ACA). In particular, 34 states have received more than $850 million in exchange establishment grants, as they work toward a November deadline for submitting their exchange plans to HHS.

But what happens to that money if the Supreme Court declares the federal health-care reform law unconstitutional this month?

Does the funding simply disappear? If so, what about money states have invested into developing exchanges while expecting reimbursement from Washington? Or will the funding continue if some states decide to push forward with the exchange concept without the ACA?

[See GOVERNING magazine's online graphic of state-by-state grants awarded for health insurance exchanges.]

The Obama administration isn't saying much. Requests for comment from HHS and the White House were met with the administration's assertion that the ACA would be found constitutional. Nick Papas, assistant press secretary for President Barack Obama, declined to say whether any contingency plan for exchange establishment funding was being developed.

If the law were overturned, and the exchange funding's authority invalidated, the White House could likely find alternative ways through existing grant programs to deliver money to states that wanted to continue developing exchanges, said Dan Mendelson, CEO of Avalere Health, an independent health policy consulting group, and former associate director of the federal Office of Management and Budget during the Clinton administration.

"The administration would go through that process on a case-by-case basis and figure out what still makes sense or whether it still makes sense," Mendelson said.

The degree of doubt around an initiative into which the federal government has pumped $1 billion appears unprecedented. "There is no parallel that I'm aware of," said Stacey Mazer, who tracks health issues for the National Association of State Budget Officers (NASBO) and has followed federal policy for more than 20 years. "The level of uncertainty is just a lot greater."

Under the exchange grant program, states are authorized a certain amount of money, spend it and are then reimbursed by HHS, according to department officials. States and HHS also enter into cooperative agreements. HHS officials said they were unable to determine how much money had already been spent by states, as some states would likely wait until the entire process is complete before submitting their spending to the department.

Consistent with the White House's confidence in the ACA, there is no contingency language present in either the cooperative agreements or the HHS announcement about the availability of establishment grants.

Federal officials declined to comment on whether states could spend money, anticipating that they would be reimbursed by HHS, and then be left with an unpaid bill. Some states have already solicited contracts from software vendors to develop the digital infrastructure for the exchanges, with the expectation of future funding.

"We just don't know how this gets handled," said Joy Wilson, senior health policy analyst at the National Conference of State Legislatures (NCSL). "For states, it's hard to prepare for something that has no model."

The ACA stated the HHS Secretary could award funds for state implementation of the exchanges. Section 2793 of the law said that: "There is authorized to be appropriated to the Secretary for each fiscal year... such sums as may be necessary" to establish the exchanges.

Obama included more than $1 billion for state exchange grants in his fiscal year 2013 budget. No HHS appropriations bills have been introduced in the House or the Senate, although House GOP leaders have repeatedly called for the health-care reform law to be defunded as a whole.

House Republican leadership is contending with several variables (from the uncertainty over the ACA to the possibility of sequestration cuts) while drafting a 2013 HHS budget, said Jed Link, spokesman for U.S. Rep. Denny Rehberg (R-Mont.), chairman of the House appropriations subcommittee that oversees HHS spending.

"If there's ever been a situation like this one, I'm not aware of it," Link said in an email. He declined to comment specifically on exchange funding.

Rhode Island Lt. Gov. Elizabeth Roberts, whose state was the first to receive multi-year Level II funding, said her state's understanding is that it will be able to spend all of the $60 million-plus that it was awarded, regardless of the ACA's legal status, under its cooperative agreement with HHS.

"It is my understanding that the funding is fully authorized no matter what happens with the Supreme Court," Roberts said in a phone interview.

However, Washington (the second state to receive Level II funding, worth nearly $130 million) has not received any information about what would become of that money if the ACA were overturned, said Jim Stevenson, spokesman for the state's Health Care Authority.

States like Rhode Island and Washington have charged ahead with developing exchanges. And in almost every case, state plans have indicated they are initially relying on federal money to fund the online insurance marketplaces. In Rhode Island, for example, funding for exchange planning is based almost entirely on federal grants through 2014, with a proposal to charge insurers to sell their plans on the exchange once it opens (an idea that is common in other states as well).

Continued funding without the ACA could make sense: some states are planning to push forward with exchanges even if the law is overturned. Rhode Island would be one of them, Roberts said, as state leaders still see the marketplaces as an effective way to expand insurance coverage. "We're trying to be smart about this," she said. "We don't want to make any decisions we would need to undo."

Some Republican state lawmakers have also adopted that perspective: Michigan state Sen. James Marleau told Governing in December that his exchange bill (which passed the Senate, but stalled in the House) would design an exchange that could function without the ACA. Michigan received a $9.8 million Level I establishment grant in November after Marleau's bill passed.

In general, state exchange planning (and spending) is "on hold," said NASBO's Mazer. "There's a little bit of hesitation." Exchange bills are pending in 18 states, according to NCSL. New Jersey Gov. Chris Christie vetoed a bill that passed through that state's legislature in May. He cited the need to wait for the ACA's legality to be resolved, reflective of many states' uncertainty about moving forward.

This story was originally written and published by GOVERNING magazine.

Dylan Scott, Governing  | 

Dylan Scott (@DylanLScott) graduated from the E.W. Scripps School of Journalism at Ohio University in 2010. While there, he won an Associated Press award for Best Investigative Reporting for a series of stories on the university’s structural deficit. He then worked at the Las Vegas Sun and Center for Education Reform before joining Governing. He has reported on the Supreme Court’s consideration of the Affordable Care Act and various education reform movements in state and local government. When out of the office, Dylan spends his time watching classic films and reading fantasy fiction (most recently: A Song of Ice and Fire by George R.R. Martin).