Minnesota's state insurance exchange, MNsure, will return $500,000 in federal grant money that it spent on office remodeling, a purpose not allowed under grant rules. Andy Slavitt, acting director for the Centers for Medicare and Medicaid Services, shown in a file photo, told Congress earlier this month that the agency was recovering misspent funds from several states. (The Minnesota Star Tribune)

MNsure must refund about $500,000 in federal grant money after wrongly using funds to prepare unused office space for its call center and other staff.

The use of grant funds for that purpose isn't allowed by the federal government, according to a letter this week from MNsure Chief Executive Allison O'Toole to a legislative oversight committee.

"MNsure will either pay that amount back, or have it deducted from future grant payments," MNsure spokesman Shane Delaney said in a statement. "MNsure continues to work with [the federal government] to finalize arrangements for the adjustment."

Minnesota is one of at least four states to use federal grants for purposes that weren't allowed.

The state of Arkansas, for example, is repaying $1 million in grant funds, according to testimony earlier this month from the acting administrator of the federal Centers for Medicare and Medicaid Services (CMS).

The agency is working with at least three other states to recover funds, said CMS acting administrator Andy Slavitt, without identifying Minnesota.

"Our job is to manage every dollar tightly," Slavitt told the U.S. House Energy and Commerce Committee.

The federal government has provided more than $5 billion in grants to states for new health insurance exchanges where individuals can purchase coverage, according to background materials prepared for the House committee. The health law provides tax credits to people who buy coverage through a government-run exchange.

In Minnesota, MNsure has received $189 million in federal grants to establish its system, which is both a marketplace for selling private insurance policies and the new IT system for the state's public health insurance programs.

MNsure's spending on the office preparation comes to less than 1 percent of its total federal grants, said Delaney, the MNsure spokesman. In Monday's letter, O'Toole said the federal government has asked MNsure to submit a corrective action plan related to the expense.

"MNsure must reconcile payments of $515,475.37 to ensure that space preparation costs are not paid for using federal grant funds," O'Toole wrote legislators. "The construction and renovation costs associated with this corrective action plan are costs a new agency like MNsure would incur."

MNsure also is submitting a corrective action plan related to prepayment of $50,000 in start-up costs to a grantee organization that provided in-person help to people seeking coverage. Federal rules call for such advances to be limited to the minimum amount needed, and be timed with the immediate cash needs of the organizations.

"MNsure agreed with this observation and has since modified its business processes to comply," O'Toole wrote.

While most states received at least some federal grant money for health exchanges — either for research, planning, development or implementation — Minnesota was in the minority of states that fully created its own health insurance exchange. California received $1 billion in grant money for its exchange, while New York received $575 million.

'No-cost extension'

Most states rely on the HealthCare.gov exchange created by the federal government, including some states that initially tried to create their own exchanges.

In her letter, O'Toole said that MNsure has been given a "no-cost extension" that will let the exchange spend unused federal grant funds into 2016. State Republicans had questioned MNsure's budget because it relies on the use of federal funds next year, even though federal approval for such expenditures wasn't in-hand.

Rep. Greg Davids, R-Preston, has sent two letters to O'Toole this fall that questioned MNsure's use of federal grant funds.

"I've been saying for months that MNsure can't pay the rent without money from the federal government," Davids said Tuesday in a statement. "Not surprisingly, we now learn MNsure has been improperly using federal tax dollars to pay for extra office space."

Christopher Snowbeck • 612-673-4744