The federal government is threatening to take over the state’s health insurance exchange within months and has restricted grant money to support operations of the Hawaii Health Connector.

Jeff Kissel, the Connector’s executive director, told lawmakers at a briefing Thursday that if the exchange created by the Affordable Care Act does not get state funding soon, the federal government will abolish Hawaii’s marketplace and run it directly.

"The federal government recently has made it clear that they need time to migrate these functions if the state is not going to support them, so they put a little more pressure on us," he said. "They want to see a sustainable state-based marketplace in Hawaii for open enrollment 2016, which commences November 2015."

State officials are worried that if the federal government assumes control of the exchange, Hawaii’s 1974 Prepaid Health Care Act, requiring employers to provide health insurance for employees working at least 20 hours per week, will be abolished, and more people will become uninsured.

"People who are now covered under Prepaid and enjoy better benefits would no longer necessarily be covered by their employer," said Rep. Angus McKelvey (D, Lahaina-Kaanapali-Honokohau), chairman of the House Consumer Protection and Commerce Committee. "That could, in essence, create more uninsured people. It could drive rates up if you have more people uninsured. That’s the threat right there."

The Connector needs $9 million to $10 million in additional funding from the state in fiscal 2016, starting July 1, to continue operations, Kissel said. Law­makers appropriated $1.5 million for the exchange this year.

The Legislature also is considering a bill that would allow the Connector to borrow as much as $28 million in bonds backed by the state over six years. The Connector pro­jects it will need the $28 million to operate through 2022, when it anticipates becoming self-sustaining.

"It’s really important for Hawaii to be able to maintain the Prepaid Health Care law and insurance system because that’s allowed us to have more rich coverage, and I think our citizens expect that," said Hazel Beh, director of the Health Law Policy Center at the University of Hawaii William S. Richardson School of Law, who was asked by lawmakers to analyze both state and federal laws. "In the individual market (on the exchange), plans are more affordable but not as good as what our employer-based plans currently offer."

Under state law, employers pay most of the insurance costs for workers since the law restricts employees’ share of premiums to no more than 1.5 percent of income.

"As it stands now, the interplay between the two laws has not caused employers to have to purchase anything particularly different, but if there was a federal piece to that, I just can’t speak to what it would look like or mean to Hawaii," Beh said. "Our state quality of life is tied to the strong health plans we enjoy here in the group markets."

The Connector was awarded $204.3 million in federal grants to build and operate the online marketplace designed to provide subsidized health coverage for those with incomes too high to qualify for Medicaid, the government health insurance program for low-income residents.

All but about $70 million of the federal grant money has been spent, and the federal government is restricting use of the remaining funds until the state provides a contingency plan to federal authorities, Kissel said.

The restriction is affecting the Connector’s ability to improve its technology, which has been a problem for users since its inception in October 2013.

"We got to the point where we told them we were going to have to turn off the lights. It’s really slowed down our operations because we can’t continue to develop our computer system and our marketing programs and our outreach," Kissel said. "I believe this is going to be temporary. The administration and Legislature are very concerned, and they’re working positively to come to the right conclusion for all of us."

Roughly 38,000 people have enrolled on the Connector to date, though not all have paid, Kissel said.

"We don’t know if when they get the bill they’re going to pay the bill, because it’s such a huge increase over last year," Kissel said. "I don’t want to say that all 38,000 are going to really end up buying insurance."

If everyone who enrolled continues on the Connector, Kissel said that would generate $3 million to $4 million in income based on a 2 percent issuer fee on plans purchased through the exchange. The issuer fee is set to increase to 3.5 percent on July 1.

Between 70,000 and 80,000 people must enroll on the exchange to generate enough operating revenue, according to Kissel, who anticipates that will take around five years.

The ACA, also known as Obama­care, requires that exchanges be sustainable in 2015.

"That doesn’t mean they have to have cash flow, but they have to have a commitment from their home states to provide the difference," Kissel said. "The most important thing to the federal government is the ability for individuals to enroll in ACA plans in 2016, so they want to be sure all state-based exchanges are financially solvent and sustainable through 2016. If there is any doubt, they have asked for contingency plans."