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Obamacare's Exchange-Based Health Insurance Will Be Better Than Medicaid. But How Much Costlier?

March 05, 2013

By Avik Roy

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So far in 2013, the most significant—and least appreciated—development in health reform is the news that the Obama administration is allowing Arkansas to apply Obamacare’s subsidized insurance exchanges to the low-income population that was supposed to receive Medicaid. As I noted last week, this development has the potential to completely reshape the landmark 2010 health-care law, in a way that provides higher-quality, but more expensive, private insurance to the poor. But there’s a key question to which we don’t know the answer: how much more expensive will exchange-based coverage be?

The estimate from the Congressional Budget Office is that average per-capita spending on a new Medicaid enrollee, via Obamacare, will be about $6,000 per year. For an enrollee on the Obamacare exchange, per-capita federal spending will approximate $9,000 per year. But how did the CBO arrive at those figures?

CBO can’t know what rates the exchanges will pay, yet

It’s quite possible that the CBO assumed that insurance plans on the exchanges would pay hospitals and doctors at rates that were comparable to traditional, commercial employer-sponsored insurance plans. However, as Anna Wilde Mathew and Jon Kamp note in a recent article for the Wall Street Journal, it appears as though exchange-based plans will be cheaper than commercial plans.

Tenet Healthcare, for one, has offered Blue Cross Blue Shield a discount of 10 percent off of its standard commercial rates. Aetna stated on its third-quarter 2012 earnings call that it was "contracting…at a rate normally between Medicare and Medicaid for the exchange population," though Mathew and Kamp report that Aetna now believes that rates will settle somewhere between Medicare and commercial. They also report that WellPoint is looking at rates "somewhere between Medicaid and Medicare…[with] talks trending toward rates close to Medicare."

For primary care services in 2011, Medicaid on average paid about 35 percent less than Medicare, which in turn pays about 20 percent less than commercial. If exchange-based plans end up offering a 20 percent discount to commercial rates, then the average per-person government subsidy of an exchange plan could be closer to $7,500, not $9,000. $7,500 is "only" 25 percent higher than Medicaid’s $6,000 per-person rate: a much less alarming figure than the CBO’s 50 percent.

Adding up all of these data points, it appears as though rates on the exchanges are likely to end up somewhere around where Medicare rates are, at least in the beginning. As plans compete for consumers’ business, there can be little doubt that the lowest-priced plans will gain the largest market share. Mathew and Kamp describe the efforts of Stonegate Advisors, a market-research firm, that has found that "premiums are the most important factor in consumers’ choices…with more than half typically opting for a [product with a narrow selection of doctors and hospitals] if it cost them at least 10% less than equivalent with broader choice."

CBO doesn’t ’have the tools’ to model managed competition

It makes perfect sense. When we shop for airline tickets on Travelocity, we don’t worry about what kind of food the airline is serving, or what movies they’re showing in-flight. We care about the price, and little else. The same will be true on the health insurance exchanges.

The CBO has previously conceded that its analysts "don’t have the tools" to project the efficiencies that consumer choice bring to health insurance under an exchange or premium support model. "We are not applying any additional effects of competition on this growth rate [of premium support subsidies] over time in our analysis of your proposal," CBO director Doug Elmendorf told Paul Ryan in 2011. "And again, we don’t have the tools, the analysis we would need to do a quantitative evaluation of the importance of these factors." (Obamacare’s exchanges and Paul Ryan’s premium-support plan for Medicare are structured in very similar ways.)

The bottom line is that because exchange reimbursement rates are likely to be lower than those of commercial plans, and because consumer-driven competition will place pressure on the prices of exchange-based coverage, it’s quite likely that the CBO has overestimated the cost difference between Medicaid and exchange-based coverage. There may be other countervailing factors, such as the adverse selection associated with community rating and other cost-increasing provisions of Obamacare.

The White House is likely directly involved in the Arkansas deal

We have heard nothing—yet—from the Obama administration as to exactly how the Arkansas agreement is set to proceed. The impression we have from Arkansas officials like Gov. Mike Beebe (D.) is that the U.S. Department of Health and Human Services is allowing Arkansas to go ahead and spend exchange-style money on the population that was intended for the cheaper, but inferior, Medicaid program.

I had previously expressed concern about whether or not HHS had the legal authority to allow Arkansas to pursue this path. HHS has long had the power to issue waivers to state-based Medicaid programs, but has usually applied the condition that any changes to the state program were fiscally neutral. My understanding is that HHS is now waiving the need for states to modify their Medicaid programs in a fiscally-neutral manner, and it appears that this policy change comes directly from the White House.

When Ohio Gov. John Kasich announced his decision to implement Obamacare’s Medicaid expansion, he said, "I want to thank [Obama senior advisor] Valerie Jarrett today, for being willing to work with us…We don’t know what the cost is going to be for buying into the exchange [for a portion of the Medicaid population], although it appears as though they’re willing to waive budget neutrality in this case." In other words, the White House is willing to let Ohio, and other states, spend more money through the exchanges, so long as the end result is that the coverage expansion gets done.

Will other states go the way of Arkansas?

What remains to be seen is whether the Arkansas deal is a one-time thing, or whether other states will adopt the same approach, expanding Obamacare’s exchanges instead of the Medicaid program. Red states like Texas and Louisiana, which have been opposed to the Medicaid expansion thus far, may be more open to expanding the exchanges. States on the fence about the expansion, like Florida and Virginia, are also sure to be attracted to the Arkansas model. However, while the exchanges will provide better health care than Medicaid will, it’s important for Congress—and its nonpartisan Budget Office—to have a good handle on how much extra this will cost taxpayers, and how best to pay for it.

Original Source: http://www.forbes.com/sites/aroy/2013/03/05/obamacares-exchange-based-health-insurance-will-be-better-than-medicaid-but-how-much-costlier/

 

 
 
 

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