Medicaid Private Option For All?

The Medicaid “private option” pioneered by Arkansas continues to dominate the headlines. First, additional states, most recently Montana, are expanding Medicaid with this model. Now, Arkansas is considering the future of its program. There has also been some thinking about the future of the Affordable Care Act (ACA) in red states in a post National Federation of Independent Business (NFIB) v. Sebelius and King v. Burwell environment.

One idea is to make use of “1332 waivers” to expand the private option, where Medicaid provides premium support for certain enrollees to purchase commercial insurance on the marketplace, to cover all or most of current enrollees. Right now the program is limited to the Medicaid “expansion” population: adults without children. The main selling point for the “private option for all” approach appears to be its palatability to red state governors, a way to expand insurance coverage where they otherwise might not.

Although politically buying private insurance may seem more palatable, once states look into this they’ll see it’s not a great deal for them. (I do not address benefit and other program issues here — those are significant enough to warrant their own post.)

A Look at Medicaid Funding

A quick reminder on how funding works in the Medicaid program: For “traditional” Medicaid enrollees, the federal government pays the majority of Medicaid costs, but Medicaid is still a large share of state spending. For the Medicaid expansion population, the federal government currently pays 100 percent of the costs (this will decrease to 90 percent in the future).

Why does this matter? If a state expands the private option to the entirety of their Medicaid program, that puts substantial state dollars on the line. So far, Arkansas has kept the private option costs in line with what Medicaid would have otherwise paid, but there are a few important caveats. The expansion population is on average healthier than traditional Medicaid beneficiaries, and Arkansas’ program even keeps “medically frail” individuals from the expansion population in traditional Medicaid, so they aren’t counted in the associated costs.

Medicaid has a small population of very expensive people. The disabled and elderly beneficiaries together comprise only 24 percent of enrollees, but they account for almost two thirds of program expenditures. A recent Government Accountability Office (GAO) report finds that 5 percent of enrollees account for half of all costs. For comparison, Arkansas’ average adult in Medicaid costs about $2,000 a year while the average disabled adult costs about $12,000 a year.

Risks and Benefits

Besides benefit risks to the elderly and disabled Medicaid populations in commercial plans, it will be very expensive for the state to pay for commercial care for these groups. The state will need to pay for very comprehensive plans and/or provide wrap-around coverage to meet Medicaid requirements. The Centers for Medicare and Medicaid Services (CMS) so far has allowed little to no premiums for those under 100 percent federal poverty level (FPL), so the state will need to pay almost the entirety of the insurance premium for the traditional Medicaid population. Cost sharing is allowed only in nominal amounts; it is worth noting that the administrative costs of collecting these payments may actually exceed the amount the state receives.

All this said, there are some benefits to the private option: Increasing the size of the risk pool in the marketplace may have helped Arkansas in actually driving down insurance premium costs. The marketplace rates in 2015 in that state were 2 percent lower on average than in 2014. A larger risk pool gives the exchange more leverage and purchasing power, and it also helps with ‘churn’ when individuals and families have income fluctuations — if incomes increase, for example, Medicaid beneficiaries can purchase similar marketplace plans with tax credits (APTC) and reduce disruption in providers and treatment. In addition, commercial plans pay more to providers than Medicaid, and we know that Medicaid provider rates matter.

However, lower marketplace insurance premiums mostly accrue to the federal government, not the states. Premium tax credits are paid with federal dollars and are benchmarked to the second lowest-cost silver plan. A lower-cost silver plan means smaller federal expenditures for the tax credits, but the state doesn’t see a benefit from that.

In any case, adding a population of high needs individuals from traditional Medicaid—rather than healthier expansion beneficiaries as Arkansas did—might offset some or all of marketplace cost savings, but that will depend on the state and the particular insurance market. The key is that commercial coverage for high needs/disabled people will be expensive and could increase what states are on hook for in Medicaid dollars.

Ultimately, the cost projections will be determined by actuaries, but looking at the data we have on how Medicaid works now it’s hard to see how states will see a good deal in any way other than politically in expanding the Medicaid private option to the wider program population.