Arkansas Medicaid-Private Option Plan Could Result In ‘No Additional Federal Costs’

Arkansas Medicaid officials say that a state plan to move Medicaid-eligible low-income citizens into a “private option” that would include subsidized plans in forthcoming health insurance exchanges could add less than 15% to costs, but it could also result in negligible additional expenses when combined with other factors.

A Department of Human Services report, which included legal research, actuarial consulting and input from the Arkansas Insurance Department, was released late Monday (March 18).

It said, “These estimates find that the private option can be fully funded with existing resources at the state level and would add less than 15% to federal health-care costs in Arkansas. In some realistic scenarios, there could be no additional federal costs at all.”

The report noted the following findings:

• The Congressional Budget Office estimate addressed a much more limited – and optional – substitution of private coverage for Medicaid, e.g., self-identifying adults 100-138% of the poverty level only. That CBO report pegged costs of Medicaid expansion at around $6,000 per individual and a private option cost at around $9,000.
• CBO didn’t estimate a market transformation like Arkansas is considering with the private option. Arkansas’ emerging plan would double the size of the state exchange and significantly shrink the market share of Medicaid compared to the private insurance market.
• CBO estimated a national average for Medicaid costs and a national average rate differential between Medicaid and private carriers. In both cases, that estimated differential is significantly larger than the actual differential in Arkansas.
• DHS does not challenge CBO’s July 2012 estimate of the overall federal impact of the optional Medicaid expansion, only the applicability of that analysis to Arkansas’ new policy option.

FACTORS AFFECTING ESTIMATES

There are a number of factors cited in the DHS notes today that suggest why Arkansas might not see any major difference in costs between a straight Medicaid expansion and the subsidized private option in the health exchanges, which will begin in 2014 under the auspices of the federal health care law.

For starters, the actuarial review found that existing provider rates in Arkansas’ private market and its Medicaid program is less than 25%.

“It is likely that introducing 250,000 low-income adults into the private market through the insurance exchange will increase competition among carriers and generate some price pressure on providers, since they would then be compensated at competitive rates for all clients. This price pressure is estimated to result in a 5% reduction in private reimbursement rates in the exchange,” the report noted.

“The competitive nature of health-plan management within the exchange, the allowable cost sharing and sharper consumer health-care decision making will reduce that differential by an additional 5% or more,” it also stated.

DHS did warn that some small populations – such as medically frail patients who remain on Medicaid – may still result in net increases to Medicaid, not 15%, but as high as 13-14% in those areas.

Still, the crux of the argument for the report’s conclusions – and the optimism it is likely to give to expansion supporters and private option advocates – is that the new population in the exchanges is likely to create “competitive pressure,” which could bring new options into the marketplace.

Also by shifting eligible Medicaid-funded adults into an exchange, there will be an estimated $700 million reduction in tax subsidies in Arkansas related to the program.

“The state-and-federal taxpayer impact may drive the incremental costs of the private option to zero, or could even produce long-term savings, depending on the size of the impact created by competition and health-plan management,” the report concludes.

You can read the two disclosures released by DHS here and here.