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The Federal Exchange: Strengths, Constraints, and Strategic Limitations

Understanding the ACA landscape in 2025

The Federal Exchange (healthcare.gov) has helped expand access to health insurance coverage and provided a streamlined alternative to building state-based systems. It does, however, carry tradeoffs for states in terms of costs, branding, data access, and policy flexibility. For some states, the features of the Federal Exchange remain a practical fit; for others, the limitations are increasingly creating pressure to reassess whether the model serves their long-term needs.

Executive summary

Despite the ACA’s intent to give states flexibility in implementing and owning state-run health exchanges, most relied on the federal platform in 2014, due largely to tight implementation timelines, technical complexity, and political considerations surrounding the ACA.^1,2 Today, 20 states and the District of Columbia operate State-Based Marketplaces (SBMs), three operate State-Based Marketplaces on the Federal Platform (SBM-FPs), and 28 continue to use the Federally Facilitated Marketplace (FFM). By comparison, when the ACA launched in 2014, 15 states operated their own SBMs, two operated SBM-FPs, and 34 ran on the FFM.³ The federal model has ensured standardized access to coverage but leaves states with fewer levers to shape coverage rules, plan insurance provider participation standards, create outreach and enrollment strategies, develop unique subsidy structures, and integrate Medicaid eligibility and enrollment systems. With enhanced federal subsidies scheduled to expire after 2025 and several states actively weighing transitions from the federal marketplace to their own state-based systems, now is an important time to consider whether the federal exchange remains the most strategic, sustainable fit for states’ unique long-term needs.

Figure 1

Introduction

The Affordable Care Act (ACA) established health insurance marketplaces with the goal of expanding access to affordable health insurance coverage, increasing transparency in plan shopping, and delivering federal subsidies to eligible individuals and families. From the outset, the law gave states flexibility: they could operate their own SBM, rely on the Federally Facilitated Marketplace FFM through HealthCare.gov, or adopt a hybrid SBM-FP. For states that chose not to build their own systems or did not meet federal readiness standards, the federal exchange functioned as a default mechanism to provide access.

State marketplace decisions in 2014 reflected a variety of considerations: logistical challenges in building complex, new IT systems, the broader political climate surrounding the ACA, and, in many cases, an informed calculation that the federal platform’s scale and administrative simplicity made it the more practical choice.⁴More than a decade later, many states remain in the model established by those early decisions. The question today is whether states’ existing structures still serve their residents most effectively—or whether they should re-evaluate the comparative costs and benefits to ensure their structure aligns with local needs and priorities.

Analysis

Strengths of the Federal Exchange (FFM and SBM-FP)

One of the core advantages of the federal exchange is its reliance on standardized IT infrastructure through HealthCare.gov, which significantly reduces the upfront costs and risks that states would otherwise bear in designing and maintaining their own eligibility and enrollment systems. Building and sustaining a state-based platform is a major undertaking, requiring significant financial investment and technical capacity. For example, Oregon and Hawaii initially launched state-based marketplaces after the ACA’s enactment but soon transitioned to the federal platform in 2015 and 2016, respectively, after experiencing operational and financial challenges. The Government Accountability Office (GAO) documented that the states incurred $84.3 million (Oregon: $57.3M and Hawaii: $27.0M) in combined transition costs during this shift.⁵ The fact that both states were willing to spend tens of millions of dollars to exit their exchanges underscores the significant ongoing costs and operational challenges of maintaining a state-based IT platform and highlights the comparative cost efficiencies of leveraging the federally managed infrastructure, where the upfront and maintenance burdens are absorbed by the Centers for Medicare & Medicaid Services (CMS).

In addition to cost advantages, the federal exchange offers operational stability and administrative support that can be particularly valuable for states with limited capacity. Because the FFM and SBM-FPs are managed by the CMS, states benefit from a centralized eligibility and enrollment engine that is already integrated with federal data sources such as the IRS and Social Security Administration.^6,7 CMS also oversees compliance, systems maintenance, and policy updates, relieving states of the need to replicate those functions on their own. This centralized management streamlines enrollment processes for consumers and reduces the staffing, oversight, and vendor contracting burden for states, allowing them to participate in a functioning marketplace without the ongoing administrative burden of an SBM.

Constraints of the Federal Exchange

A significant financial implication of the federal exchange is that user fees collected from issuers largely flow to CMS rather than being reinvested in the state. For 2025, CMS finalized a FFM user rate fee of 1.5% of premiums for Qualified Health Plans (QHPs) on the FFM and 1.2% of premiums for QHPs on the SBM-FP.⁸ This means that 1.5% of the total premium monthly costs for plans offered by issuers on the FFM are returned to CMS to offset overhead costs such as IT infrastructure, administration, etc. Only a small portion of these fees are returned to states, limiting states’ flexibility to direct resources toward localized needs. By contrast, State-Based Marketplaces set and retain their own user fees. The structure and amount of these fees varies significantly from state to state. Because these revenues are collected and reinvested locally, SBMs can dedicate funds to state-specific outreach, navigator programs, customer service, and IT improvements. This reinvestment capacity is not available to FFM or SBM-FP states, creating a long-term disadvantage for those seeking to tailor their marketplace operations or expand innovation. See Figure 2 below for an overview of how user fees are captured by insurance providers, CMS, and states, and differ across state and federal exchanges:

Figure 2

In addition to the financial implications of user fees, states on the federal platform may face constraints in outreach and branding. Under the FFM, CMS controls national marketing campaigns, call center protocols, and navigator programs, which means messaging cannot always be tailored to local needs. SBMs have greater autonomy to design targeted campaigns and develop community partnerships, while states on the FFM may feel limited by more standard federal approaches.¹³ For example, Virginia branded its Medicaid engagement through member advisory councils and leadership involvement, while Colorado emphasized consumer-led councils and partnerships with community organizations.¹⁴ In both cases, the branding and visibility of consumer input strengthened trust in state programs and coincided with sustained enrollment growth, with Colorado reporting a 5-year compound annual growth rate (CAGR) of 11.1% and Virginia 7.6%.¹⁵ Federal exchange limitations can reduce effectiveness in reaching harder-to-enroll populations and building state-specific awareness

Another constraint of the FFM is the limited access states have to granular enrollment and consumer data. Because CMS manages HealthCare.gov and controls most of the underlying systems, FFM and SBM-FP states often receive only aggregated reports rather than the real-time, transaction-level data available to State-Based Marketplaces.¹⁶ This lack of transparency can create blind spots for policymakers: states may be unable to track consumer drop-off points in the application process, evaluate outreach effectiveness across regions, or identify disparities in enrollment among subpopulations. In short, reliance on federal infrastructure can limit state autonomy in data collection and flexibility in policy design.¹⁷

Finally, policy flexibility is constrained under the federal model, particularly in areas such as Medicaid and CHIP coordination, enrollment timelines, and the design of coverage programs. States on the FFM or SBM-FP have less ability to integrate exchange operations with state eligibility systems, create supplemental subsidies, or modify enrollment periods and benefit structures.² While CMS’s standardized processes provide a measure of stability, they also limit the levers states can use to tailor their marketplaces to local priorities.¹³

What MGT thinks?

There is no single “correct” answer to exchange models. The federal platform may be the best fit for some states, while others gain significant advantages from implementing an SBM. What matters is intentionality—states should not retain their marketplace structure from 2014 because of inertia, but should actively consider whether their current approach is meeting their residents’ needs and supporting the state’s long-term policy goals.

When making this assessment, every state should consider a common set of questions:

How important is branding and local outreach to your enrollment strategy?
Do you need real-time granular data access to drive policymaking, or is federal-level reporting sufficient?
How well does your current exchange align with Medicaid, CHIP, and other state programs?
What level of cost neutrality, fee control, and reinvestment in state initiatives would you like or do you require?
How much flexibility do you want to adjust subsidy structures, enrollment periods, or benefit designs?

These questions can inform a decision framework to consider whether an adjustment of your current exchange model may make sense. States that place high value on branding and outreach, data access, policy flexibility, and local control of user fees, for example, may find that SBMs offer greater strategic alignment. Conversely, states that prioritize administrative simplicity and lower infrastructure requirements may conclude that the federal model is the better fit.

The experience of the 20 states and the District of Columbia that have successfully implemented SBMs since 2014 provides evidence that the model is durable and operationally effective. With new policy and legislative dynamics (and uncertainty) on the horizon, states will do well to evaluate their current approaches and prepare to adapt quickly to meet the needs of their citizens. State leaders have a responsibility to their constituents to always be asking, “Does our current model serve our residents in the best way possible?”

Call to action

MGT’s State & Local Management Consulting Team can help your state examine and answer these questions. We have developed a comprehensive state-based marketplace assessment that provides a structured framework to evaluate your exchange model across the five key dimensions outlined above. This solution delivers a comparative cost–benefit analysis tailored to your state’s circumstances, enabling leaders to make informed, intentional, evidence-based recommendations.

Our advisory services include:

Current State Assessment: Evaluate whether your current exchange model aligns with resident needs and policy priorities.
Impact Analysis: Model the financial, enrollment, and policy impacts of adopting an SBM, remaining on the federal exchange, expanding targeted outreach efforts, etc.
Implementation Planning: Provide project management and technical assistance for states pursuing transitions.
Peer Learning: Leverage insights from the coalition of states that have successfully launched SBMs and sustained them over time.

With uncertainty ahead, now is the moment to ensure your exchange model is the right fit for your state.