Updated numbers: private option will save state budget $757 million, consultant says | Arkansas Blog

Monday, March 7, 2016

Updated numbers: private option will save state budget $757 million, consultant says

Posted By on Mon, Mar 7, 2016 at 11:47 AM

click to enlarge po_costs.png

The private option projects to save $757 million to the state budget between 2017 and 2021, the state's consultant, the Stephen Group, testified today to the Health Reform Legislative Task Force. The updated projection, based on real data from fiscal year 2015 and the first half of fiscal year 2016, represents a 70 percent increase in net savings (more than $300 million) to the state versus the Stephen Group's original projection of $438 million in August.

The state has to pay for a small portion of private option costs (5 percent in 2017, slowly increasing to 10 percent in 2020 and beyond). However, the state also accrues savings and revenues that project to make the PO revenue positive for the state on net. See our post on the August projections for a breakdown of how this works and what the numbers above mean.

The savings for the state's bottom line continue even when the state has to start chipping in its full 10 percent match in 2020 and beyond. And this is key: the updated numbers show the state coming out ahead in 2020 and beyond even if the governor insists on ignoring the impact of increased state tax revenues because of the billions of dollars in federal spending.

In short, according to the Stephen Group, if the legislature ends the private option, it will be catastrophic for the state budget. 

Prior projections were based on estimates of enrollees and costs; the new projections have been updated based on the actual experience — the real data — of the private option thus far. Plugging in that data shows that the net impact of the private option is even better for the state's bottom line than previously predicted. Two factors contributed to the updated projection:

1) Expanding coverage under the private option costs less than expected. 

The total number of beneficiaries is higher than projected. However, the cost per-person is dramatically lower. In particular, the ten percent of beneficiaries deemed "medically needy" are much less costly than originally projected (they cost about half as much per person as predicted). Even though there are more people covered by the private option than state officials predicted, the per-person costs are so much less than projected that, in total, the PO costs much less than previously estimated. In the first half of fiscal year 2016 alone, the private option has come in $100 million under projections. That means the federal government is spending less (the feds pick up most of the costs of the PO). Going forward,  it’s also good news for the state’s bottom line (starting in 2017, Arkansas has to start chipping in small portion of PO costs). If the real data on beneficiaries and costs is applied to adjust expectations in the future, the gross costs of the private option will be around $600 million less between 2017 and 2021 than previously predicted (or around $60 million lower for the state's costs). 

2) The state is accruing greater savings than predicted for transfer populations. 

Certain required Medicaid programs have seen reduced enrollment because beneficiaries are covered by the private option. Why does that save the state money? Because the old Medicaid programs require the state to pay a 30 percent match, whereas the state has a much smaller match for the private option Medicaid expansion (again, that's 5 percent in 2017 and 10 percent in 2020 and beyond). That difference — paying 10 percent for these beneficiaries instead of 30 percent — leads to savings for the state. 

Three categories of transfer populations have led to greater savings in practice than previously predicted: 1) Pregnant women covered by a special Medicaid pregnancy Medicaid program — many low-income women now may be covered by the private option when they become pregnant. 2) SSI Disability. Some people who were signing up for SSI mostly in order to get health insurance are signing up for the private option instead (the state has seen a sharp reduction in SSI enrollment since the implementation of the PO, outpacing the trend in other states). 3) Medicaid spend down for low-income people without health insurance who face catastrophic medical costs. In certain cases, Medicaid will cover the costs of medically needy people who face mammoth medical expenses beyond what they are able to pay. Many of these people are now covered by the private option. 

In all three of those cases, the state saves money if people are covered by the private option as opposed to the traditional Medicaid program. Those savings were built in to previous projections, but the Department of Human Services was conservative in predicting the impact and the savings in practice have been higher than expected. Applying the new data going forward, the state projections to save about $300 more from the transfer populations between 2017 and 2021 than previously predicted. 

The task force is set to vote on Gov. Asa Hutchinson's proposal to continue the private option with conservative tweaks — what the governor calls "Arkansas Works" — this afternoon, and the full legislature will convene in April to determine the future of the policy. If the legislature refuses to go forward, it will leave a massive hole in the budget. Put another way, the legislature will have less wiggle room for spending or for tax cuts than it would have if the private option sticks around. That hole now appears to be much bigger than previously projected. 

The updated projections suggest that the state budget will take a $206 million hit in the next fiscal year alone if it ends the PO. Hutchinson will probably use a slightly different number, but it would still make a daunting task for the legislature in this year's fiscal session. The governor, for reasons he has not fully explained, refuses to factor in the state tax revenues that will accrue from the billions of dollars in federal spending. Applying the governor's fuzzy math, the updated projections say that the state budget will take a $142 million hit in the next fiscal year. 

Meanwhile, even using the governor's selective math, the private option will accrue net savings for the state in 2020 and beyond, when the state has to start chipping in 10 percent of the costs. The governor previously estimated that the private option would cost the state $50 million in fiscal year 2021 (that's the Stephen Group's original estimate minus the state tax revenues on the federal spending). That was the basis for his demand that the legislature come up with $835 million in savings from the traditional Medicaid program. The updated projections, however, put the state around $30 million in the black in fiscal year 2021. While there are strong arguments to reform the traditional Medicaid program on the merits, the governor's case that these changes were needed to pay for the private option, already flimsy, now has no basis in the Stephen Group projections. 

postscript: The Stephen Group also provided a separate estimate with different assumptions: If the state didn't re-establish ARHealth Networks, a program discontinued because its beneficiaries can now be covered by the private option (that's $83 million of the savings over five years); if only half of the savings due to the reduction in SSI are attributable to the PO ($108 million over five years); and if none of the state funding for uncompensated care is reinstated ($203 million over five years). Even using these assumptions, the state still saves $363 million over five years.

The Stephen Group described this as a "more conservative" estimate, but the thing to keep in mind is the politics. This estimate assumes that the state cuts the funding for uncompensated care that was in place in 2013, before the private option (this is the money that the state was sending to to community health centers, local health departments, community mental health centers, UAMS, and the Department of Corrections in order to help cover the costs of uncompensated care). The state has been able to dramatically reduce that spending in recent years because the private option offered coverage to many of the patients for those providers. But without the PO, refusing to reinstate this funding would represent a massive hit of hundreds of millions of dollars to UAMS, state prisons, and community health centers. I will leave it to readers to decide whether that it politically realistic. 

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