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The Arkansas-Obamacare Medicaid Deal: Far Less Than It First Appeared

April 01, 2013

By Avik Roy

When Arkansas Gov. Mike Beebe (D.) first announced that he had reached a deal with the Obama administration to use the Affordable Care Act’s private insurance exchanges to expand coverage to poor Arkansans, it seemed like an important, and potentially transformative, development. The myriad ways in which the traditional Medicaid program harms the poor have been well-documented, and it looked like Beebe had come up with an attractive—albeit expensive—way to provide the poor with higher-quality private insurance. A Good Friday memo from the U.S. Department of Health and Human Services, however, splashes cold water on that aspiration. It’s now clear that the Beebe-HHS deal applies a kind of private-sector window dressing on the dysfunctional Medicaid program, and it’s not obvious that the Arkansas legislature should go along.

Background on the Arkansas-Obamacare deal

Here’s some background, for those who haven’t been following this seemingly obscure, but highly consequential, story. Gov. Beebe’s Republican-controlled legislature was expressing a lot of skepticism about implementing Obamacare’s expansion of the Medicaid program. Medicaid costs an enormous amount of money, at both the federal and state level, without improving health outcomes for the people it is ostensibly designed to help.

Leading Republicans told Beebe that they would be open to using the health law’s subsidized private insurance exchanges to offer coverage to the poor, if the Obama administration would agree. Beebe flew to Washington to meet personally with HHS Secretary Kathleen Sebelius. Beebe returned to Little Rock on February 26, and told legislators that Sebelius had indeed agreed to Beebe’s proposal to use the exchanges to cover the low-income population that had been otherwise slated to join Medicaid.

"Basically [HHS has] agreed to give us about everything that we’ve asked for," said Beebe. "What that really amounts to is taking the Medicaid population that would be expanded…and use those federal Medicaid dollars and purchase insurance through the exchange. So they would buy private insurance through the exchange for the entire population, and [HHS has] given us permission to do that."

The big issue with the proposal was its cost. The Congressional Budget Office has estimated that, on average, adding a patient to the Obamacare exchanges would cost $9,000 per person per year, compared to $6,000 for Medicaid. The biggest reason for the cost difference is that private insurers pay hospitals and doctors far more than Medicaid does, in order to ensure that health-care providers will actually accept their insurance. People enrolled in Medicaid, by contrast, often have difficulty finding doctors who will accept their insurance.

Yes, an exchange-based expansion would cost more

In response to this fiscal concern, Arkansas’ Department of Human Services published a memo in which the agency argued that an exchange-based coverage expansion would cost at most 13 to 14 percent more than Medicaid would, and possibly less. DHS found that in Arkansas, commercial insurers paid providers about 24 percent more than Medicaid did. By taking that 24 percent figure, and applying some competitive effects from the exchanges, DHS arrived at its 13-14 percent estimate.

DHS has now released the underlying numbers for its cost projections. Optumas, the actuarial consultants that DHS retained, projected that expansion of the traditional Medicaid program would cost the federal government $2.96 billion, and the state $396 million, in 2023. Optumas estimated that expansion of the exchanges, on the other hand, would cost incrementally less: for the feds, $2.88 billion, and the state $384 million, in 2023. Ten-year savings, from 2014 to 2023, would be $592 million for federal taxpayers, and $61 million for the state.

How could expanding the exchanges cost less than expanding Medicaid? A big part of Optumas’ projection comes from the theory that Medicaid would pay much higher rates to cover the Obamacare-eligible population. "DHS’ estimates…do not yet take into account the likely increase in traditional federal Medicaid provider reimbursement rates that would be required to secure access for a Medicaid expansion population," the agency wrote in its memo. "Incorporating that likely rate inflation will further reduce any net impact of the private option on federal spending."

HHS insists that states preserve Medicaid’s wasteful design

It’s far from clear, however, that the Obama administration will accept Arkansas’ theory regarding higher provider rates. The Good Friday memo from HHS makes clear that it will only permit state variations on the coverage expansion that are "comparable" to what HHS would have spent otherwise.

Basically, what HHS states in its memo is that its deal with Arkansas is not that different from its traditional endorsement of the use of private managed-care plans to administer the Medicaid benefit. But HHS explicitly states that these private plans cannot modernize the design of Medicaid insurance to make it more cost-effective.

A big problem with Medicaid, since the program was first enacted into law in 1965, is that its design encourages wasteful health spending. The law explicitly prohibits the use of significant co-pays to steer Medicaid enrollees into more cost-effective practices. For example, many states charge co-pays of less than $5 if a Medicaid patient goes to the emergency room to receive routine care. Remember that many Medicaid enrollees have a hard time finding a doctor who will see them. Is it any wonder, then, that many Medicaid patients get their routine care in the emergency room?

When Indiana was designing its innovative Healthy Indiana program, which offers a segment of the Medicaid population a combination of subsidized health savings accounts and catastrophic coverage, overcoming this limit on co-pays was a big problem. "A lot of times, the co-pays you’re allowed to do with CMS are so low, the providers don’t even collect them. $2, $4, you can’t control utilization," says Seema Verma, the architect of the Indiana program. In Indiana, "there’s a $25 charge for emergency room use for a childless adult, but $2-5 for adults with children…that was imposed on us by CMS rules."

The HHS Good Friday memo maintains this insistence on preserving Medicaid’s wasteful design. "States must have mechanisms in place to ’wrap-around’ private coverage," HHS writes, "to the extent that…cost sharing requirements are greater than those in Medicaid."

What this means, in practice, is that the kinds of plans that insurers will offer on the Obamacare exchanges—which will be able to use tiered co-pays and other instruments of modern health insurance in order to drive cost-efficient care—will not be available under the faux-exchange plans that Obamacare assigns to the Medicaid expansion population.

Will faux-exchange plans offer inferior physician access?

It’s not clear that the faux-exchange plans, the ones that would be offered to the ACA’s Medicaid expansion population, will be able to pay doctors and hospitals at rates that are comparable to the higher rates offered in the commercial insurance market. Paying providers at private-sector rates costs more money.

As HHS notes, the Medicaid law does allow for private insurers to manage Medicaid plans, so long as these variations are comparable in cost to traditional Medicaid. "Cost effective," says HHS, "generally means that Medicaid’s premium payment to private plans plus the cost of additional services and cost sharing assistance…would be comparable to what it would otherwise pay for the same services."

While "comparable" is a vague term, it remains to be seen whether or not Arkansas’ deal—and similar proposed deals in other states—will have the opportunity to pay providers at competitive rates. If they can’t, then the faux-exchanges will result in the same poor access to physician care that Medicaid does today.

Waivers for faux-exchanges will expire in 2016

Another key point in the HHS memo is that the waivers—to sort-of-apply exchanges to the Medicaid expansion population—will expire at the end of 2016. "Starting in 2017," HHS explains, "State Innovation Waiver authority begins which could allow a range of State-designed initiatives." Exchange-based expansions could theoretically continue under the new authority, but the Obama administration could just as easily yank the states back into the traditional Medicaid program.

If you trust the Obama administration, then it’s not an issue. But if you were cynical, you could imagine that HHS is trying to make a display of showing flexibility now, because the agency knows that it can withdraw that flexibility later on, after the coverage expansion has been implemented, and states have relinquished their negotiating power.

Tennessee calls HHS’ bluff

And that flexibility, as we’ve seen, is limited. Tennessee Gov. Bill Haslam (R.) asked HHS for a similar deal to Arkansas’, with the additional request that HHS "allow co-pays for those who can afford to pay something." HHS said no. "All we’re asking from Washington is to allow us to use the federal funds to provide coverage [for the Medicaid expansion population] on the health care exchange in the same way many other Tennesseans will access coverage," said Haslam in a March 27 press release.

But because of the "lack of clarity" from HHS around these points, and the refusal of the agency to consider reforms to Medicaid’s cost-sharing provisions, Haslam has stated that he will not ask the Tennessee legislature to expand the Medicaid program.

The Tennessee situation tells us a lot about what’s really going on in Arkansas. Unless HHS has made a special exception for Arkansas that won’t be available to other states, the Obama administration is requiring that "exchange" based coverage of the Medicaid expansion population is indistinguishable from garden-variety managed-care Medicaid, of the kind that is already widespread in the states. This is window dressing disguised as flexibility.

Arkansas reformers need to ask some tough questions

Arkansas Republicans—who have, up to this point, been largely supportive of the possibility of applying the exchanges to the Medicaid expansion population—need to start asking tough questions.

The first, and most important, question is: will exchange-based plans in Arkansas that cover the Medicaid population have the flexibility to design their co-pays in a way that is analogous to that used by modern private insurers? Will they be able to incentivize Medicaid patients to stop overusing the emergency room, and engage in other cost-effective and preventive practices?

The second is: will Medicaid-oriented exchange-based plans be able to pay providers at the same rates that regular exchange-based plans will? Or will these faux-exchange plans be stuck with existing Medicare reimbursement rates? If it’s the latter, then it’s hard to see why this will do much to make those beneficiaries better off.

The third is: will these faux-exchange plans allow for reformed payment structures, of the kind that reward positive health outcomes instead of the ancient fee-for-service model that incentivizes wasteful health spending? Tennessee’s Haslam suggests that this was a sticking point in his negotiations with HHS.

For a long time, we’ve been trying to get some details as to what specifically HHS and Arkansas have agreed to. We finally got some of those details last week. And they aren’t encouraging.

HHS wants to make sure that as much of the coverage expansion as possible is in place before the next presidential election. Reformers in Arkansas and elsewhere should appreciate that, right now, they have the leverage to encourage the Obama administration to take a more reformist posture toward Obamacare’s Medicaid expansion. Thus far, it looks like the administration is heavy on the posturing and light on the reform.

Original Source: http://www.forbes.com/sites/aroy/2013/04/01/the-arkansas-obamacare-medicaid-deal-far-less-than-it-first-appeared/

 

 
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