Arkansas: Happily Waiver After?

by Adrianna McIntyre and Karan Chhabra

The dust has finally settled around the memo HHS released Friday, a two-pager offering clarity on some questions that have been floating around the wonkosphere. If you need to catch up, Sarah Kliff did a stellar job parsing out the implications on Wonkblog. The memo was met with notably diminished enthusiasm among Republicans, who had been optimistic about flexibility that the newly elaborated “private option” might offer.

On Monday, Gov. Mike Beebe received a letter from Secretary Sebelius giving Arkansas a “conceptual” green-light, though she didn’t indicate whether they should proceed under 1905(a) authority—the somewhat controversial approach we’ve been discussing for the past month—or under a more traditional 1115 Medicaid demonstration waiver. Acting under 1905(a) would involve using Medicaid funding to purchase private plans without a waiver; this is relatively uncharted territory, and regulations are still pending. Demonstration waivers are subject to agency approval and seem to have more predictably structured requirements—possibly just because the process has been around longer.

The verdict? Arkansas appears to be going for a waiver, after all. We’d previously reported that this wasn’t going to be a waiver demonstration—that’s what Gov. Mike Beebe said in late February—but circumstances change. State officials believe that Arkansas is positioned, perhaps uniquely, to pull off a private expansion at no cost to the federal government. In light of additional details from HHS, it’s our understanding that they have decided a 1115 waiver better suits their needs. The recent set of state Senate amendments includes a provision to “apply for any federal waivers necessary to implement the program in a manner consistent with this subchapter.”

An important factor motivating legislative support in Arkansas is that HHS purportedly will not enforce its budget-neutrality requirement through an annual federal contribution cap, which is how most waivers have worked in the past [1]. According to John Selig, the Director of Arkansas’s Department of Human Services, HHS has indicated that they’ll “carefully monitor and evaluate” the state’s performance over several years without imposing that particular funding restriction [2]. The waiver also gives Arkansas added flexibility to impose cost-sharing liabilities on beneficiaries beneficiaries who fall in the 100-133% FPL income range (those below 100% are protected under the Medicaid statute).

Just to be clear, this isn’t something we consider legally controversial. Even though HHS has customarily maintained budget neutrality requirements for 1115 waivers, we recently learned that it’s “not required by statute or regulation.” We pulled up the relevant language to be sure, and had one of those legal-scholar-types vet our interpretation. Basically, the law gives the Secretary a fair bit of discretion to determine whether and how to impose cost-effectiveness requirements, provided that a proposed plan furthers the purposes of the Medicaid statute.

If an original condition of approval of a waiver project was that Federal expenditures under the project not exceed the Federal expenditures that would otherwise have been made, the Secretary shall take such steps as may be necessary to ensure that, in the extension of the project under this subsection, such condition continues to be met. In applying the previous sentence, the Secretary shall take into account the Secretary’s best estimate of rates of change in expenditures at the time of the extension.

Skeptic or not, you have to admit that circumstances for the next few years are unique—we really don’t know how much Medicaid rates will change in wake of the expansion, complicating any efforts to accurately forecast “cost-effective” funding levels. Taking a wider chronological perspective to assess Arkansas’s success or failure is probably a pragmatic approach.

What happened to the previous proposal? Well, that FAQ memo happened. Among the stipulations that HHS put forward was that “market beneficiaries must be able to choose an alternative to private insurance to receive Medicaid benefits.” That is to say, some form of “traditional” Medicaid still had to be on the table, and the choice had to stay with the consumer. This creates a catch-22 for Arkansas, who wants to see their newly-eligible in the private exchanges. If they keep their FFS Medicaid reimbursements low, beneficiaries would almost certainly seek private coverage—but that undermines cost comparability. If the state were to make the reimbursements more generous (as they’d been planning), comparability ceases to be an issue, but people are more likely to flip back into Medicaid. For those feeling extra wonky, there might also be selection problems to consider, if we draw parallels to Medicare Advantage. Bottom line: a waiver approach gives DHS more authority directing beneficiaries into the private market.

So, all of the hubbub about whether “comparable cost” means the same thing as “cost-effective” is essentially moot now, and Adrianna can stop compulsively checking the Federal Register’s website for the final rules related to 1905(a) premium assistance—unless another state decides to pursue a private expansion under that authority (we’re watching you, Texas).

Still, things remain to be seen. Will states really be able to pull off a cost-effective expansion through the private market? The literature on Medicaid managed care provides good reason to remain skeptical. How does HHS expect the states to quantify savings from competition and other factors? People who would know—people who have tried to do this—say it’s not easy. Private insurers will face other challenges, too—not receiving the same discounted rates on prescription drugs that Medicaid enjoys, for example. And while we’re likely to see reduced churn, we still wonder about the implications of keeping the currently-eligible—arguably the state’s most vulnerable citizens—on Medicaid while shuttling the newly eligible into exchanges. This diminishes the relative market concentration of Medicaid (the program becomes a smaller economic player in the state), which could actually exacerbate beneficiary access issues.

The expansion still needs to get through the Arkansas state legislature, requiring a 3/4 majority, but that may be soon upon the horizon. It’s in their interest to act fast—the fed’s 100% match rate for 2014 is on the line. If the state can pull off this cost-effectiveness feat—and they sure seem confident, even after facing dubiously-raised brows from both sides of the aisle—they’ll be poised all the better for the State Innovation Waivers coming in 2017.


1.  With a contribution cap—like we see in earlier state waivers for managed care, for example, or the Massachusetts expansion—the federal government contributes a funds up to a certain threshold, over which the state becomes responsible for excess costs. This was typically executed on a per-capita basis, so states would bear the risk for higher per-person costs than expected, but not for unanticipated enrollment. 

2.  Minor clarification: Selig is quoted on the Arkansas Times blog suggesting a timeframe of three to five years assessing their progress, but the HHS memo from Friday dictates that demonstration projects must end no later than December 31, 2016.


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Adrianna works in clinical research and is a graduate student in public policy & public health at the University of Michigan. Follow her on Twitter @onceuponA.

Karan is a first-year student at Robert Wood Johnson Medical School and Duke graduate who previously worked in strategic research for hospital executives. Follow him on Twitter @KRChhabra.


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