Arkansas “private option” clears state legislature, but more hurdles to come

by Adrianna McIntyre

After three tense days, an initially-failed vote in the state House, and an unexpected amendment in the Senate, the Arkansas legislature has finally taken ownership of their contentious private Medicaid expansion plan. A quick—and potentially enormous—caveat: if CMS doesn’t accept Arkansas’s plan as is, the deal falls apart, courtesy of a severance clause. I haven’t parsed the legislation closely enough to know if there are any immediate red flags, but that merits note.

The state is no longer pursuing this under the obscure 1905(a) provision of the Medicaid statute as they’d initially planned; instead, they’ll apply for an 1115 demonstration waiver. We’ve already explained their decision; click through if you’re interested in the nuances. The TL;DR version is that a waiver actually gives Arkansas additional discretion in designing their expansion. What’s more (though this surely wasn’t a factor at play) it gives the rest of us front-row seats to watch the “private option” unfold.

Wonk alert: 1115 waiver applications will be available for review. Here’s a fun fact for the nerdiest of health policy nerds: since last April, 1115 waiver applications have been subject to public notice and comment requirements. This doesn’t seem to be common knowledge—it was met with surprise when I mentioned it to several professors and health policy colleagues. This means that we’ll get to see the numbers behind budget-neutrality calculations from any state pursuing an expansion through this mechanism.

And Arkansas has done some interesting things with their numbers. For example, their calculations assume that they would need to hike Medicaid reimbursement rates 14% to match private rates, but they also argue that competition on the exchanges should bring private premiums down to near-Medicaid levels. I have a hard time with the competition-as-panacea argument; Medicaid managed care doesn’t provide evidence for it—this isn’t managed care, but it’s similar. At any rate, the argument that Medicaid rates must reach private levels seems inconsistent with the legacy of Medicare (which reimburses below private providers, though above Medicaid) and the experience in Massachusetts (whose Medicaid rates are still below private and Medicare rates, even with exchanges that have been operating since 2006).

I hesitate to jump to any firm conclusions, because I’m not terrifically familiar with the demographics or health profile of Arkansas’s population—not to mention that their full actuarial report still hasn’t been released—but I’ll be curious to see what sort of budget justifications HHS requires for the 1115 application. At any rate, as long as a state can satisfy the budget-neutrality requirement on paper, there will probably be a fair amount of latitude until 2017, when 1115 demonstrations must end; it would be difficult to impose annual contribution caps in the context of reform, because we don’t really “know” the counterfactual.

The mandate won’t apply to a bunch of newly-eligible Arkansans. Will that matter? This is an open question, so take it with a grain of salt—but it’s a quirk that’s stayed below the radar. According to the text of the Affordable Care Act, the mandate is subject to an income floor, below which the tax penalty cannot legally be enforced. That floor is the income threshold for filing federal tax returns; some back-of-the-envelope calculations suggest it’s about 87% FPL. While we don’t have data about that specific population, we can make some inferences: approximately 75% of Arkansas’s newly-eligible Medicaid population falls below 100% of the federal poverty line, and over half of them are below the age of 35 (both estimates from here). The Arkansas Department of Human Services has argued that the demographics of the population—that they’re so young—is precisely what makes the private option so attractive; health plans could benefit because they might bring overall premiums down. But what if insurance companies struggle to enroll these individuals?

Although the population faces little to no cost-sharing to dissuade them from seeking coverage, there are still logistical barriers to  enrollment, which could create risk-pool uncertainty for the competing health plans on the exchange. This didn’t really matter under a traditional expansion, because everyone in the population would end up in Medicaid eventually, but private-market competition could throw a wrench into things; we don’t know who will end up where. If insurance companies fear that they’ll enroll disproportionately sicker individuals than anticipated—because the healthy can wait until they’re sick to enroll without adverse effect—the natural reaction is to raise the price of premiums accordingly. Individuals on the exchanges are protected from rate hikes by their tax subsidies (which would likely prevent the dread “death spiral“) but insufficient enrollment of young and healthy individuals below the federal poverty line could impose a serious financial burden on the federal government. That said, perhaps the comprehensive premium assistance, limited open enrollment, or vigilant outreach efforts could mitigate any problems.

Remember, this was never supposed to happen. I sometimes lose sight of the simple reality that states and the Administration are trying to work within a framework that was established before the Supreme Court decision last summer—a framework that assumed the Medicaid expansion would be universal. This is messy because it’s unintentional, and it’s going to keep being messy while everyone sorts it out.


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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.


2 thoughts on “Arkansas “private option” clears state legislature, but more hurdles to come

  1. policyrx2006 says:

    Thanks again for great news and analysis. Glad to see the young folks taking the lead on this.

  2. […] What to watch next on the Arkansas Medicaid expansion. “The TL;DR version is that a waiver actually gives Arkansas additional discretion in designing their expansion. What’s more (though this surely wasn’t a factor at play) it gives the rest of us front-row seats to watch the “private option” unfold.” Adrianna McIntyre in Project Millennial. […]

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