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November 2013

POLICY PAPER
THE PRIVATE OPTION:
by Nicole Kaeding
In early 2013, Arkansas surprised many by deciding to expand Medicaid in line with the Presidents health care law, the Patient Protection and Affordable Care Act (PPACA). However, instead of expanding the traditional Medicaid system, Arkansas opted to create a so-called private option aiming to ameliorate the impacts of a broken, costly system for thousands of Arkansas families while protecting the state from ObamaCare. Regardless of the name, the private option is Medicaid expansion and will burden the state of Arkansas.

Medicaid Expansion by Another Name

Medicaid Expansion during the 2000s


Before PPACA, multiple states sought to expand their Medicaid programs with horrible effects. Previous expansions provided coverage to hundreds of thousands more than projected, going over-budget and threatening state finances. In 2000, Arizona expanded Medicaid via a ballot referendum.3 This expansion sought to provide insurance coverage to an estimated 47,000 parents by 2010. However, in 2010, 150,000 new parents in the expansion population were part of the Medicaid program. Similarly, the expansion for childless adults covered 150,000 more individuals than predicted. As a result, the costs for Arizona taxpayers exploded. Instead of costing an estimated $389 million in 2010, the expansion cost over $1.6 billion. And ironically, Arizonas uninsured population as a percent of total population grew.4 Maine experienced similar results from its Medicaid expansion in 2002. The expansion population was estimated at 11,000 individuals but quickly grew to 25,000.5 Additionally, this expansion population was more expensive to insure than previous enrolleesa trend that also was observed in expansion in Delaware and Oregon.6

Medicaid
Medicaid is a joint state-federal program created in 1965 to provide health insurance to low-income populations, particularly the disabled, pregnant women and children. The system functions with most control residing in the federal government. States simply function as de-facto administrators of the program, implementing dictates and mandates from Washington, D.C. This structure results in a failing insurance product for families and recipients. Health outcomes for Medicaid patients lag those on private insurance. In some studies, health outcomes are worse for Medicaid patients than those who are uninsured.1 In fact, a recent study appearing in the New England Journal of Medicine found no significant improvements on health outcomes from Medicaid expansion.2

Regardless of the name, the private option is Medicaid expansion and will burden the state of Arkansas.

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Medicaid Expansion under PPACA


A key component of PPACA was the expansion of Medicaid to all individuals below 133%with a 5% income disregardof the federal poverty level. This is approximately $30,000 for a family of four. To encourage states to participate, the federal government promised an enhanced reimbursement rate, known as the Federal Matching Assistance Percentage (FMAP). PPACA set the FMAP for the newly eligible population at 100% from calendar year 2014 through 2016, decreasing to 90% in 2020 and into perpetuity. However, if a state did not choose not to expand Medicaid, they would not only forfeit the enhanced FMAP for the new populations, but would lose all current Medicaid funding. Medicaid, according to the National Association of State Budget Officers, currently represents almost 25% of state budgets.7 Twenty-six states sued the federal government, argued that this structure was coercive and unconstitutional. On June 28, 2012, the Supreme Court announced via a 7-2 ruling that it agreed with that states. Such a system functioned as gun to the head according to Chief Justice John Roberts.8 The High Court then ruled that states must be given the choice whether to expand Medicaid without the potential loss of current Medicaid funds.

Supporters argued that this was a freemarket alternative to expanding Medicaid. Individuals would be able to gain access to health insurance. Additionally, by using the health insurance exchange, according to supporters, would eliminate many of the health-related issues with Medicaid as the newly enrolled would have access to private insurance, not traditional Medicaid coverage. Before expansion, 750,000 Arkansans are covered by Medicaid. This includes individuals who are blind, disabled, pregnant women and parents below 17% of the federal poverty level (FPL). It also includes children below 200% of the federal poverty level. The expansion increased coverage to all individualsincluding childless adultsbelow 138% of the federal poverty level. Under the plan, current Medicaid recipients would stay on the traditional Medicaid system. Additionally, the most-costly 10% of recipients would move into the traditional system. The remaining individuals would go into the private option model.

Knowing these facts, Arkansas decided to go ahead and expand Medicaid.

Cost of Expansion
However, supporters of ARs Medicaid expansion failed to acknowledge the immense costs being forced unto Arkansas families and taxpayers. Under projections circulated by the actuary firm hired by Arkansas to review the plan, this premium support model of expansion would cost the federal government $18.9 billion for the next ten years while costing the state $1.59 billion.9 10 First, its important to note that the federal and state spending projections assume that the federal government honors its promises under the PPACA. As mentioned earlier, PPACA says that the federal government will pay 100% of expenses for the newly eligible population for calendar years 2014 to 2016. Starting in 2017, the federal funding will begin to decrease reaching 90% in

Arkansas Medicaid Expansion


Knowing these facts, Arkansas decided to go ahead and expand Medicaid. However, instead of expanding the traditional Medicaid structure, Arkansas developed the so-called private option. Under this plan, new enrollees in Medicaidan estimated 250,000would purchase insurance from the new Arkansas health insurance exchange created under ObamaCare. Individuals would receive a premium support payment to purchase insurance.

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2020. However, the Obama administration has signaled on several different occasions that it is looking to cut the FMAP to save federal money. The President reportedly offered it to Speaker John Boehner during the 2011 Debt Ceiling negotiations. It was also included in his Fiscal Year 2013 budget.11 Current projections estimate total federal spending for newly-eligible individuals to top $800 billion over the next ten years placing immense pressure on the federal budget.12 It is nave to believe that the federal government will honor this promise, as weve seen the Obama Administration renege on many of its promises related to the health care law throughout implementation. The Arkansas plan did seek to fix this issue by saying that Arkansas would opt-out of expand if the FMAP decreased, but that is easier said than done.13 Second, even if the promises are kept, Arkansas must fund $1.6 billion in expenses over the next ten years. Current plans include a 1.8% bed tax to take advantage of the FMAP. Under the bed tax scheme, the state will essentially launder money under the Medicaid system to scam federal taxpayers out of more money. Again, the federal government has discussed eliminating this tax structure from the Medicaid program. Support for this change is bipartisan in Washington, D.C. Arkansas should be cautious about using bed or other provider taxes to fund its share of expansion. Finally, the state-share funding proposals rely heavily on Arkansass 3.5% premium tax. Tax revenue will increase under the private insurance expansion model as more insurance plans are sold in Arkansas. However, this tax revenue is just another funding scheme. The money is pulled down from the federal level through the premium subsidies and filtered through to the state from the premium tax.

more expensive way to expand Medicaid than the normal model that other states are using. According to the Congressional Budget Office, private insurance costs 50% more than Medicaid. Using private insurance to expand Medicaid will drive costs upwards. The actuaries retained by Arkansas, who produced the aforementioned spending calculations, made several dubious assumptions in their modeling. If any of these assumptions turn out to be inaccurate, which is quite likely, Arkansass costs will explode. First, the modeling assumes that the reimbursement rates paid to providers under traditional Medicaid and the private insurance plans are equal. Currently, Medicaid plans in Arkansas pay only 62% of private insurers. The actuaries specifically assume that under the traditional Medicaid expansion, Arkansas will close that gap to encourage adequate provider networks. Functionally, that inflates the cost of traditional expansion compared to private expansion. Second, the actuaries assume that by injecting choice and competition into Medicaid, through the exchange vehicle, insurance costs will decrease. Theoretically, this would be correct. Adding thousands of individuals into a competitive marketplace should place downward pressure on prices. However, as this plan is designed, those forces will not be at play. Individuals on Medicaid, according to recent HHS guidance, must be protected from cost-sharing through co-pays or co-insurance. Removing price-signals removes the incentive for individuals to pick the lowest-cost plans. Additionally, this analysis ignores that insurance plans sold via the health insurance exchanges will provide numerous benefits to individuals that might not be utilized. This inflates the cost relative to current insurance plans.

It is nave to believe that the federal government will honor this promise, as weve seen the Obama Administration renege on many of its promises related to the health care law throughout implementation

Other Cost Considerations


In fact, the Arkansas expansion model is a

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HHS Requirements and Waivers


During the debate for the Arkansas expansion, the federal Department of Health and Human Services released guidance on such an expansion model. Dubbed the Good Friday Memo, this guidance included several important constraints for states looking to expand via the Arkansas model. One of the ways that private insurance differs from Medicaid coverage is cost-sharing. Private insurance plans use deductible and co-pays to encourage responsible usage of insurance. For instance, a typical insurance plan will include co-pays for a doctors office visit, but larger co-pay for an emergency room treatment (unless the individual is admitted). This is to encourage individuals to use the lower-cost treatment when possible. According to HHS, any expansion using the premium support model must fix this anomaly. Any expansion using federal Medicaid dollars must provide wraparound coverage to eliminate any of this cost-sharing.14 Removing cost-sharing increases costs for taxpayers; Arkansas actuarial analysis did not include the costs of these wrap-around benefits. For instance, private insurance commonly applies a $25 co-pay to doctors office visits. Medicaid limits it to $4 per visit. Using this example, the state of Arkansas would need to pay the $21 co-pay differential. This wrap-around coverage further drives up the cost for state taxpayers. The legislative text authorizing the Arkansas model says that Arkansas will institute cost-sharing above 50% of the federal poverty level and will seek a waiver from HHS by 2015.15 However, it seems unlikely that HHS will reuse its position on its Good Friday Memo. On September 27, 2013, HHS approved Arkansas initial waiver for its private option model of expansion.

Since Passage
After Arkansas received approval of its Medicaid waiver, it has worked to implement this flawed expansion strategy. In aid its enrollment efforts, Arkansas sent a letter to all current recipients of the Supplemental Nutrition Assistance Program (SNAP) in the state.16 By simply signing and returning the letter, SNAP recipients would be automatically enrolled in Medicaid. Over 63,000 individuals returned the letter signing up for coverage. As of November 13, 2013, 73,000 individuals had applied for Medicaid coverage in Arkansas.17 To make matters worse, if an individual signed and returned the auto-enrollment letter to the state, but does not select an insurance plan on the exchange, the state auto-assigns the individual to an insurance plan.

Conclusion
Advocates for taxpayers should not expand Medicaid through the traditional expansion mechanism or through the modified private insurance model. Either expansion dramatically increases costs for consumers and will allow hundreds of thousands of new Arkansans to become dependent on government for their health insurance. Instead of buying into the failing statefederal Medicaid structure, advocates of reform should push HHS to supply states with a true block grant to allow states, not federal bureaucrats, to determine the best Medicaid reform for residents.

By simply signing and returning the letter, SNAP recipients would be automatically enrolled in Medicaid.

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Damien J LaPar, et. al, Primary Payer Status Affects Mortality For Major Surgical Operations, University of Virginia, Charlottesville, VA. Available Online: http://www.americansurgical.info/abstracts/2010/18.cgi 2 Katherine Baicker, et al, The Oregon ExperiementEffects of Medicaid on Clinical Outcomes, The New England Journal of Medicine, 368;18, May 2, 2013. 3 Jonathan Ingram, Medicaid Expansion: We Already Know How the Story Ends, Foundation for Government Accountability, March 11, 2013. Available Online: http://www.floridafga.org/wp-content/uploads/FINALMedicaid-Expansion-We-already-know-how-the-story-ends.pdf 4 Ibid 5 Ibid 6 Ibid 7 National Association of State Budget Officers, State Expenditure Report, Table 5, 2012. Available Online: http://www.nasbo.org/sites/default/files/State%20Expenditure%20Report_1.pdf 8 National Federation of Independent Businesses v. Sebelius, 567 US__(2012). 9 Financial Impact of Arkansas Private Option Plan for Insurance Premium Assistance, Available Online: http:// www.washingtonpost.com/blogs/wonkblog/files/2013/03/Explaining-cost-estimates-for-premiumassistance-3-18-13.pdf 10 Additional Explanation Of the Acturial Cost Comparison Between Traditional Medicaid and Private Coverage in the State Exchange, Available Online: http://humanservices.arkansas.gov/director/Documents/Detailed%20 explanation%20of%20QHP%20cost%20differential.pdf 11 Fiscal Year 2013: Budget in Brief Department of Health and Human Services. Available Online: http://www.hhs.gov/budget/fy2013/budget-brief-fy2013.pdf 12 John Holahan, Matthew Buettgens, and Stan Dorn, The Cost of Not Expanding Medicaid, The Kaiser commission on Medicaid and the Uninsured, July 2013. Available Online: http://kaiserfamilyfoundation.files.wordpress.com/2013/07/8457-the-cost-of-not-expanding-medicaid4.pdf 13 Ark. Code 20-77-2105(h) 14 Medicaid and the Affordable Care Act: Premium Assistance, March 29, 2013, Department of Health and Human Services. Available Online: http://www.medicaid.gov/state-resource-center/FAQ-medicaid-and-chip-affordablecare-act-implementation/downloads/FAQ-03-29-13-Premium-Assistance.pdf 15 Ark. Code 20-77-2105(j) 16 Letter to Supplemental Nutrition Assistance Program, September 2013. Available Online: https://www.statereforum.org/sites/default/files/ar_targeted_enrollment_thru_snap_letter.pdf 17 David Ramsey, ObamaCare in Arkansas: Private Option Going Swimmingly, Rest of Health Insurance Marketplace hasnt going, Arkansas Times, November 13, 2013.
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