The Hawaii Health Connector has prepared a contingency plan to shut down operations by Sept. 30 after lawmakers failed to pass legislation to keep the state’s troubled Obama­care insurance exchange afloat.

"Now that it is clear that the state will not provide sufficient support for the Hawaii Health Connector’s operations through fiscal year 2016 (ending June 30, 2016), the Connector can no longer operate in a manner that would cause it to incur additional debts or other obligations for which it is unable to pay," Connector officials said in a report released Friday to the nonprofit’s board of directors.

The plan, obtained by the Hono­­lulu Star-Advertiser, states the Connector will cease new enrollments Friday, discontinue outreach services May 31 and transfer its technology to the state by Sept. 30. The Connector’s workforce will be completely eliminated by Feb. 28. The exchange has 32 employees, 29 temporary staff and 12 full-time contractors.

"Staff reductions will commence immediately, with the executive director (Jeff Kissel) exiting once the bulk of operational activities end," the report said. "If the state cannot facilitate an orderly transition, the Connector’s operations will abruptly end, as the Connector does not have the resources to continue operations."

The state was notified in March that Hawaii was out of compliance with the Affordable Care Act, also known as Obama­care, because the Connector wasn’t financially sustainable at the start of this year and wasn’t integrated with the Medicaid system, which determines eligibility for subsidies and tax credits obtained through the exchange. The federal government subsequently restricted grant money to support the Connector and moved to take over its IT functions to allow residents to enroll in coverage through the federal marketplace, healthcare.gov.

Gov. David Ige’s administration is negotiating with the federal government to release grant money to avoid the closure of Hawaii’s online marketplace, designed to provide subsidized coverage to residents with incomes too high to qualify for Medicaid, the government health insurance program for low-income residents.

Under the contingency plan, Connector functions would be transferred to the state so that the roughly 37,000 enrolled on the exchange would not lose their coverage. However, residents would have to re-enroll in healthcare.gov to ensure coverage next year.

To sustain its operations, the Connector needs to enroll 70,000. The program is funded by a 2 percent fee on each policy, which is set to increase to 3.5 percent July 1.

"I don’t think we want to set off public alarm," House Health Committee Chairwoman Della Au Belatti (D, Moiliili-Makiki-Tantalus) told board members at an executive session meeting Friday that was closed to the public. "We’re going to have to expect some layoffs will have to occur. I know that hurts … but we have to save the technology assets. Then maybe we can rebuild the people assets. If we don’t have negotiations that’s successful with the Feds, everything will blow up."

The Legislature recently granted the Connector just $2 million in state funding, less than half the $5.4 million Connector officials said they needed to continue operations this year.

"We have to figure out a way to make up the difference," Kissel told board members. "Our cash will run out in September if we continue with an active operation."

An estimated $1 billion in federal funds for Medicaid is also in jeopardy if the technology used to determine eligibility for tax credits cannot connect to the federal marketplace by November, the start of open enrollment, Rachael Wong, director of the state Department of Human Services, which administers Medicaid, told board members.

Because the Connector doesn’t have enough money to keep the state-based marketplace active, the federal government has the right to cut off Medicaid funding under the ACA. Medicaid, which serves more than 300,000 residents, costs more than $2 billion a year, about half of which is funded by the federal government and half by the state.

The federal government has required the state submit its contingency plan to move to healthcare.gov no later than Monday. The estimated cost of migrating to healthcare.gov this year is about $30 million.

The Connector was awarded $204.3 million in federal grants to build and operate the online marketplace. All but about $70 million of the federal grant money has been spent. The federal government’s restriction on the remaining funds is affecting the Connector’s ability to improve its technology, which has been a problem for users since its inception in October 2013.

Some state officials are worried that if the federal government takes over 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.

"All I know is healthcare. gov doesn’t work," Sen. Roz Baker (D, West Maui-South Maui) told board members. "We have to take the best calculated risk. There’s a lot of unrealistic expectations."