Thursday, February 28, 2013

Medicaid "Private Option" deal costs more, still good deal for state

Posted By on Thu, Feb 28, 2013 at 11:36 AM

John Selig image
  • DAVID RAMSEY
  • John Selig testifies before Senate Public Health Committee on new Medicaid option

Make sure to read Tuesday's post (which was updated several times through the night) for a detailed explanation of the state's new option for Medicaid expansion. But the short version is that new plan would 1) be just as good for low-income uninsured folks 2) cost taxpayers more 3) represent a windfall for hospitals, providers, and insurance companies.

The fact that the costs will likely be HIGHER is a strange turn for a new plan that was pushed for and has been tentatively embraced by Republicans who were ostensibly concerned about long-term costs. Of course, they like it because it's a transfer to private companies in lieu of a public program. But that leads to a "kludge" that may be a clunkier and more expensive form of government.

The Congressional Budget Office estimated that the government paying for someone to buy private insurance on the exchange would cost $3,000 more per year than paying for someone to have Medicaid. This estimate operated under the assumption that the government was merely subsidizing, with consumers picking up a small portion of the premium, so if anything it's an underestimate. That said, there are too many unknowns at this point to say with any certainty how much more the "private option" will cost — we don't even know how much the the private-insurance premiums on the exchange will cost. Still, the simple point remains: the government buying private health insurance for folks is more expensive than paying for Medicaid.

For the first three years, this will be the feds' problem, but eventually Arkansas would start chipping in, and the new plan would likely increase costs for the state. However, as we've been noting all along, expanding coverage leads to significant savings that offset the costs. DHS projected that Medicaid expansion would save the state more than $700 million between 2014 and 2025. House Speaker Davy Carter cancelled an independent inquiry into the cost of expansion because of the game-changing news of the "private option" but the question of costs and savings remains just as important.

To figure out what this latest deal means for the state, the DHS study is a good place to start. They noted three costs to the state of expansion: 1) The cost of the newly eligible folks under expansion, estimated to be around 215,000 people. 2) The cost of existing eligibles who were likely to sign up for Medicaid because of the publicity surrounding expansion, estimated to be around 35,000. This is sometimes called the "woodwork effect" because people come out of the woodwork, but a nicer term is the "welcome mat" population — folks that really should be on Medicaid. 3) Administration costs of adding folks to the rolls. (The feds fund new eligibles and admin but the state eventually has to kick in.)

DHS also noted three categories of savings: 1) Some folks currently in the Medicaid program would transfer to the expansion pool, costing the state less because of the better match rates from the feds. 2) The state currently spends money on uncompensated care for public hospitals, prisons, and community health clinics, which would be saved if folks had coverage. (This is specifically direct state spending on uncompensated care, separate from the benefit to hospitals, local governments, etc.) 3) The federal government would spend billions in the state on expansion, which would generate state tax revenue.

What DHS found in their study was that the savings were greater than the costs. What about the new "private option"? Let's take these costs and savings one by one to see what the impact of this new deal might be.

Cost 1) New eligibles — this is where costs would be expected to go up. The government would pay for their private insurance.

Cost 2) There would be no expected change in the "woodwork" population. Existing eligibles still go to Medicaid and get the old match rates.

Cost 3) Administration costs would presumably go down for the state because private insurance companies would be handling enrollment. There might also be logistical benefits to reducing "churning" — folks moving between Medicaid and the exchange as their income changed, which would no longer happen.

Savings 1) Tax revenue: This will likely be higher, precisely because the new plan is more expensive. If the cost to insure more than 200,000 new eligibles is greater, that means more federal money flowing in to the state, and more state tax revenues as a result. In short, the federal stimulus boost is bigger.

Savings 2) Uncompensated care: Presumably the savings accrued here will be the same under either plan, so no change. (In fact, reimbursements for previously uninsured would likely be higher coming from private insurance instead of Medicaid.)

Savings 3) Transition populations: Again, the savings accrued here should be the same, so no change.

There's also an additional form of revenue likely to be part of the new plan: co-pays and other forms of cost-sharing.

So, taken as a whole, for the state of Arkansas in a vacuum, the private option remains a great fiscal deal. The costs of providing folks insurance would likely be higher than under the old Medicaid expansion plan, but additional savings from administrative costs and more tax revenue could well offset those costs.

Of course, Republicans have been saying those offsets are "funny money" so hopefully they'll change their tune now that it's no longer the hated Medicaid program that's being expanded.

And while those offsets help the state, the deal still looks like it would be more expensive for the federal government.

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